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On the day that short-selling of the banks is lifted comes a warning from one leading broker that we can expect them to carry on making substantial losses for the next couple of years.
Ironically, the warning was issued by the broking arm of one of those banks — Royal Bank of Scotland — that was rescued by the Government and, in turn, partially nationalised.
It has been tempted to repeat its underweight rating on the UK banking sector in a report entitled Living on a Prayer. The broker warns that scarce and expensive wholesale funding is likely to constrain unguaranteed new lending appetite this year and next. This will result in big losses for the high street banks until the end of 2011.
RBS has cut its rating on Barclays, unmoved on 130.4p, from hold to sell and slashed its target price from 185p to 110p, and raised Lloyds TSB, 4.9p better at 108.4p, from sell to hold, but cut its target from 260p to 105p. In addition, it has dropped Standard Chartered, up 17p at 783½p, from hold to sell and its target from 850p to 640p. RBS is also the latest broker to come out against HSBC, which has been downgraded from hold to sell with its target almost halved from 850p to 450p.
HSBC, 3½p firmer at 551p, earlier ran into a fresh bout of selling in Asia after Goldman Sachs followed the lead of Morgan Stanley and cut its rating from hold to sell while adding the shares to its conviction sell list.
It also told clients to brace themselves for news of big losses this year and dropped its target for HSBC to HK$49, lower than the HK$52 set by Morgan Stanley that saw the bank's share price slump to a 10-year low. This has slumped from 682p since the start of the year. Dresdner Kleinwort takes the view the selling has been overdone, and has raised its rating from hold to buy.
But there are those who think it is no longer prudent to hold shares in banks that have been part-nationalised. Full nationalisation cannot be ruled out, and they calculate the shares in Lloyds TSB, HBOS and RBS, 3.6p up at 43.5p, might only be worth 1p apiece. HBOS stock remained suspended ahead of the start of trading on Monday in shares of the enlarged company after the completion of its merger with Lloyds TSB.
But after seven days of consecutive falls, it was time for investors to end their losing streak, encouraged by the strong finish to trading on Wall Street last night. News of a further $20 billion (£13.7 billion) of emergency funding for Bank of America prompted a rally in bank shares and the rest of the market in general. Not even the massive losses at Citigroup and Bank of America-owned Merrill Lynch could halt the charge, or the nationalisation of Anglo Irish Bank.
Wall Street will be closed on Monday for Martin Luther King Day, so many stock-market bears took the opportunity to wind up their positions. As a result, the FTSE 100 index set about clawing back some of its losses with a rise of 87.70 at 4208.80. It had fallen more than 11% in the previous seven trading days. But dealers described the rally as largely technical and said there was little evidence of institutional investors buying the market.
GKN fell 21 to 93½p. Cazenove says the deepening crisis among carmakers has started to affect companies supplying components, and has dropped its rating from in-line to underperform. The broker also slashed its pre-tax profit forecast by 57% to £74 million, saying the company can no longer rely on the market for agricultural equipment to resist the downturn.
The biggest faller among blue-chips was the package tour operator TUI Travel, down 6¼p at 213p. It is selling off its shipping division, but there are fears banks, such as Royal Bank of Scotland may no longer be willing to help finance the deal.
Imperial Tobacco was a firm market, adding 9p to 1889p after pushing through price rises for some of its fags in Spain. Dresdner Kleinwort is excited by the move, which it says is good news for the company. It has raised its target from 1850p to 2000p.
