Banking shares slumped yesterday after influential analysts warned they might need more capital, while the City regulator announced it would end the ban on shorting of financial stocks.
BANKING shares slumped yesterday after influential analysts warned they might need more capital, while the City regulator announced it would end the ban on shorting of financial stocks.
Analysts at Deutsche Bank said yesterday that banks face rising losses on bad loans as developed economies slip into recession.
"We remain uncertain that capital levels are sufficient to prompt banks to lend without government support leading to higher unemployment and impairment charges and credible risks of another round of bank recapitalisations," analysts Jason Napier and Andrew Hill said.
Barclays, HBOS, Royal Bank of Scotland and Lloyds TSB have all boosted their capital cushion in recent weeks. Within the UK bank sector, the analysts favour Barclays the most, with Lloyds TSB the least favoured.
"With HBOS's December 2008 profit warning suggesting that corporate loan losses may already be running ahead of 1992 peaks, the economy set to slow and commercial property prices to fall further in our view, we see significant downside risks to consensus earnings expectations," the pair said.
They added: "Given our current concerns over credit quality and capital adequacy... we believe that any significant rally in the first quarter of 2009 in particular is an opportunity to reduce exposure to banks with weaker credit risk profiles such as Lloyds TSB, HSBC and Royal Bank in particular."
This prompted a sell-off in banking shares, with HBOS closing down 6.75p, or 9.2%, at 65.75p, and Lloyds TSB down 4.25p, or 3.3%, at 125.75p. Royal Bank, now 58% government-owned, fell 5.1% before recovering to close flat at 52.5p, while HSBC dropped 3p to 679p. Barclays closed up 4p, or 2.6%, at 161p.
The Financial Services Authority also revealed it will not seek an extension to the ban on short-selling of financial stocks which ends on January 16. It said it would reintroduce the ban if necessary. It has proposed continuing to require investors, such as hedge funds, to declare significant short positions until at least June 30.
Currently an investor must declare when a net short position exceeds 0.25% of a firm's share capital. Further disclosures will now only be required if the position moves by greater than a 0.1% band.
