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Spread Betting Review | Which Banks Will Be Nationalised?
By Paddy Power
Only three months ago, Gordon Brown claimed that he had “saved” the banks. Unfortunately it’s looking increasingly likely that he is going to have to save them again, this time by taking some of them into public ownership. With the UK short selling ban now revoked, you can short the UK banks and make a lot of money if nationalisation does occur.
There is no official plan to nationalise more UK banks at the moment or set up a “bad bank” system. So why did the banks share prices collapse this week? Well, more and more market analysts now believe that the UK is on a course of “creeping nationalisation”. Nationalisation would result in shareholders losing a lot. As the stock market is a forward looking mechanism, it has to discount the banks share prices by the probability that they will be nationalised. Some have been discounted by more than others. Let’s have a look at them.
The Current State Of The UK Banks
Royal Bank of Scotland is undoubtedly top of the list for nationalisation. Following their warning that 2008 losses could reach £28bn and an increased government stake to 70%, their path to public ownership seems to me to be inevitable. It looks like a sorry finish for a company, now worth only £5bn, that paid £50bn in cash for ABN AMRO only 18 months ago. Lofty ambition or foolish hubris?
The Lloyds TSB shotgun acquisition of HBoS resulted in it picking up about £21bn of assets for about half that price. They also got substantial bailout funds to help make the new Lloyds Banking Group work. But the risk now seems to be outweighing the benefits. Lloyds is already 43% state owned and if they accept the UK government’s new offer, the taxpayer will become the majority shareholder. This is not a situation that management would want, but they will find it difficult to resist the new deal for very long. And if they can’t prove the viability of their independence in the coming months, the government will be just forced to step in anyway. The clock is ticking.
Barclays could easily be in the same state as RBS, but for the fact that their bid for ABM AMRO failed. This has helped them avoid the need for any bailout money so far. But the clock is ticking for them too. They decided to buy Lehman Brothers US operations for £1bn when they really couldn’t afford it. Their balance sheet is looking vulnerable with a lot of unknowns. And any time in this crisis when the unknowns have become known, share prices have dived. Barclays will have to take some sort of government funding now. But there is increasing market speculation they are also heading towards nationalisation.
HSBC are going to survive (famous last words!) They actually have more deposits than Standard Chartered Share Priceloans in the UK which gives them the ability to absorb losses and write-downs, of which there have been a lot. Their size, diversification and creditworthiness have seen them become the biggest bank in the world by market capitalisation.
Standard Chartered have also performed admirably throughout this crisis, mainly due
to their focus on emerging markets, especially Asia. They continue to deliver strong results and positive future guidance, meaning they are a rare growth company in these times of rapid de-leveraging.
More Trouble For The Irish Banks
In Ireland, the same nationalisation questions are being asked. Allied Irish Bank and Bank of Ireland have seen their share prices plunge 58% and 57% respectively since the start of the week. They need more funding and can’t seem to entice private investors to give it to them. Finance Minister Brian Lenihan has said there are no proposals to nationalise either of them… but he was saying the same thing about Anglo Irish Bank only a short time ago.
The third remaining Irish public bank, Irish Life & Permanent, isn’t in as much danger of being nationalised (at the moment). They weren’t part of the government plan for recapitalisation as their funding needs are much lower than the other two. The Irish Life part of the business looks to be fine – if only they could get rid of the Permanent TSB side!
Possible Trades
The UK financial shorting ban has been revoked (for now anyway) so markets can return to some sort of efficiency. But which banks are worth shorting? If your view is that one of the above is going to be nationalised, then there is still a lot of value in going short. Barclays have a market capitalisation of about £5.5bn which means it has plenty of room to fall further. Also if your view is that the world economy is going to get significantly worse, there is potentially value in shorting Standard Chartered.
On the other hand, this huge sell off could be overkill. The respective governments do not want to have to resort to nationalising their whole banking systems. Everything else will be tried first. As a result there could great value out there. AIB and Bank of Ireland, with retail branches in every town in Ireland, are now valued at a mere €533mln and €356mln respectively. But if you see queues outside your local branch that would be a good signal to get rid of your long position… fast!
Another possible trade is a pairs trade, explained in the hyperlinked blog. Here you would go long on the bank that you think will outperform and short the bank you think will underperform. In this case, you don’t really have to make a call on the banking industry in general. You just have to pick the banks that will do the best and the worst, although that’s not an easy task itself.
Conclusion
The sell off this week has been caused by speculation rather that hard fact. The market has decided to shoot first (and shoot often) and ask questions later. This reaction to what can only be described as rumours has undoubtedly been over the top, but that’s what the market has been driven to after been caught unawares so many times in the past.
For me, I don’t think that Allied Irish Bank are in such grave danger, so I think there is good value to a short term long position on them.
Whatever happens; the person who gets it right will make a lot of money.
The Galloping Zebu can be found grazing on the plains of the spread betting blog at Paddy Power Trader.
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