Bank recovery is unlikely but true

Chief Market Strategist, Cantor Index

WHO would have thought that the banking sector would make such a spectacular recovery in 2012? And who expected it would do so in the wake of a breathtakingly toxic European sovereign debt crisis, which came to a crescendo when the European Central Bank president Mario Draghi made that immortal statement last summer – “We will do everything that needs to be done…”. This calmed the troubled waters of an exasperated and fragile bond market, when Europe was staring recession in the face, and growth was falling all around the world.

Markets have been sucked in by Draghi’s reassuring rhetoric. Consequently, nothing meaningful is ever solved. Those in charge of the decisions that matter have no incentive to actually do anything beneficial for their countries’ economies. Look at Greece. Its economy has completely imploded to the point that children are being admitted to hospitals every week for malnutrition. And it will still have a projected debt to GDP ratio of 133 per cent in 2022. No one seems to care, as we are told it will be alright on the night.

To cap it off, huge fines have been meted out to banks by regulators. Libor manipulation, money laundering and the miss-selling of payment protection insurance have led to £13bn in costs for UK banks. And you have to respectfully ask the question whether banks have been downplaying the true, long-term implications of losses, impairment charges and provisions in recent years.

The Bank of England and other central banks have made it abundantly clear that significant amounts of fresh capital will need to be raised in the ensuing years. Fortunately, the central banks and Basel III have ordained that the banks be given an extra four years until 2019 to meet their liquidity requirements, which is extremely accommodative.

Against a background of such dark cumuli nimbus clouds of financial concern, banks have made huge gains in the last year – much to my personal chagrin, as I did not have the vision to get involved. Compared to this time last year, Goldman Sachs shares have risen by about 34 per cent, JP Morgan Chase by 25 per cent, Societe Generale by 61 per cent, BNP Paribas by 31 per cent, RBS by 33 per cent, Lloyds by 62 per cent, and HSBC by 28 per cent. Barclays has risen by almost 100 per cent since last July. There are still analysts who believe there are more gains to be made, particularly with French and German banks. But it’s a big ask.