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We expect stock prices to continue volatile and continue susceptible to headline risk. Look for winners to include banks that have strong balance sheets and plenty of capital to take advantage of current problems.
As in the US, non-US bank stocks have been hammered this year due to the financial problems that began in the US subprime mortgage market and spread globally to engulf many major financial institutions in most countries. The median stock price decline for non-US bank in the Zacks' universe is 50.5% compared to a loss of 38.8% for the S&P 500. This includes median price declines for non-US banks in the Zacks' universe of 64.7% in Europe, 51.8% in Asia, and 48.1% in Latin America.
In response to the global financial crisis, governments have taken dramatic action to forestall the possibility of global meltdown. These rescue efforts include:
- United Kingdom--£37 billion to buy bank shares and £400 billion in debt guarantees and other measures
- Germany--500 billion bank guarantee and funding plan
- France--320 billion bank lending guarantee 40 billion to buy bank shares
- Ireland and Australia--blanket guarantee of all bank deposits
Assuming global financial system stability is achieved, non-US banks still have several hurdles ahead. Asset quality should continue to trend down as the recession takes hold. Consumers and businesses are likely to have problems meeting financial obligations as economies weaken. Revenues will be hurt from several different quarters. Loan growth will decelerate, and could turn negative, and with it, net interest income. Moreover, for many of the larger banks, capital markets activities will reflect global economic weakness. In short, revenues will fall, while credit losses will rise, with a negative impact on the bottom line.
Going forward, we expect stock prices to continue volatile and continue susceptible to headline risk.
Look for winners to include banks that have strong balance sheets and plenty of capital to take advantage of current problems.
For example, Banco Santander ( ) has recently taken over the entire UK retail branch network of troubled mortgage lender Bradford & Bingley after the UK government took it over, and is reportedly interested in acquiring the remaining 75% interest in Sovereign Bancorp ( ) , a Philadelphia-based bank with lending operations in the Northeast whose shares have been pummeled recently. (STD currently owns about 25% of Sovereign)
Stocks that could prove problematical include banks who participate in government recapitalization programs, such as The Royal Bank of Scotland plc ( RBS ) . In return for the government capital, these banks must submit to other government intervention, including limits on dividend payouts and nomination of board members. This will limit their financial flexibility for a while, which could hurt stock performance.
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