Banks face destructive spiral after bailouts, says Panmure

Broker Panmure Gordon's Sandy Chen issued a stark note on the state of the UK banking sector, forecasting a "large crisis" with widespread implications.

"We believe that the sheer pace and scale of central bank rate cuts worldwide point to a global concern about deflation, which is valid," said Chen. "Instead of a recovery for the UK economy in 2009, we expect the opposite: further economic contraction and a further rise in bad debts and bankruptcies."

Where UK lending has boomed over the past two decades, Panmure expects that lenders and borrowers will reverse this trend, with borrowers paying off debts before considering spending or investing.

The result will be "stagnant top lines and falling asset prices", said Chen. He predicts this will lead to a worsening picture involving more breached loan covenants, which will in turn cause more bankruptcies and forced selling, followed by further deleveraging and deflation - and more economic contraction.

Panmure believes that shareholders face serious losses, and has downgraded all UK banks and cut most of their price targets. It lowered HBOS-Lloyds TSB from buy to hold, with all other UK banks rated sell. Barclays' target price has been slashed from 130p to 55p.