BANKS have had a torrid time for the past year and a half. But there were signs of life yesterday, at least for some. Royal Bank of Scotland (RBS) and Lloyds Banking Group had a good start to the first trading day of 2010, rising more than 9 per cent and 3 per cent respectively. Shares were boosted by an upgrade for RBS from French bank Exane BNP Paribas and rumours that Brazil’s Itau Unibanco is looking into acquiring stakes in both banks.
CFD traders will be wondering whether this is a trend that is likely to continue in 2010. The first thing to note is that any excitement is unlikely to spread out from RBS and Lloyds to the rest of the banking sector. For the likes of HSBC, Barclays and Standard Chartered, it’s likely to be a question of steady-as-she-goes in 2010.
So are the good vibes around the two part-nationalised banks justified? The reason for BNP Paribas’ positivity was summed up in the title of its note: Things Can Only Get Better. After a torrid 18 months, RBS and Lloyds can really only go one way. The report pointed out that: “With the halving of the RBS share price over the past four months and an expectation that, over the next few quarters, some early progress in terms of asset disposals will be achieved.” It went on to say that the bank expects fundamental, and not purely speculative, investor interest to return in 2010.
The reason that investors will take a fancy to the two banks is simple. Both have been ordered to sell off some of their assets under EU rules governing nationalised entities. Selling certain segments of their business at the right price this year, then slimming down to a more manageable size should pay off in the future. Indeed, some analysts prefer their banks small and simple. Robin Savage, an equity strategist at Collins Stewart, says that a fundamental problem with big banks is that they have “too many moving parts”. He says that banks with steady, sensible growth of their loan books are better placed in the long-term than more exciting ones which take more risks.
SIMPLE IS BEST
Following this logic, smaller banks like the new RBS and Lloyds which concentrate on traditional banking activities like loans and deposits, and avoid complex structured products, are a better bet for CFD traders.
There are also sound reasons to believe that the economy could help RBS and Lloyds. Asset sales, improving economic conditions and a fall in unemployment could boost the outlook for earnings for both banks. An improving economic backdrop also reduces the chance of further bad loan write-downs, which could boost profit in the medium term.
But hold your horses before you plunge in. RBS still has some problems, and although the backdrop is not as dire as it once was, its recovery will be slow. As Paribas says, RBS is “a stock with few obvious near-term catalysts.” It doesn’t expect earnings per share to move into positive territory until 2012, which is when it also expects the next dividend to be paid. Instead Paribas is basing its decision to turn positive on RBS on the fact that it now trades at just 0.6 times estimates of 2011 net asset value.
For those interested in the banking sector more generally, it is worth watching out for new banking regulations on the horizon. The Basel Committee on Banking Supervision has suggested increasing and improving the capital requirements for banks. If these measures are implemented, then that could limit profits. For all the good news, shorting a banking index still looks clever.
CFD ANALYST PICKS
My Pick: Short Crude from $81.25
Expertise: Combining Fundamental and Technical Analysis with Risk Management
Average Time Frame of Trades: 1 day to 1 week
A new year has begun, and risk appetite has charged ahead for all assets that are offering yield. However, this is not yet a trend. At the beginning of the new year, investors who took their funds out of the market for accounting or risk purposes are likely to reinvest them. This is a market adjustment. Crude is the exemplification of this theory, with an overbought setup and retest of the $82 level.
TECHNICAL CURRENCY STRATEGIST
JOEL S KRUGER
My Pick: Sell Gold at $1,150
Expertise: Technical Analysis
Average Time Frame of Trades: 5-10 days
The gold price has come off since it hit $1,225 in December, with the market trading down to $1,075 ahead of the latest bounce. The broader trend is bullish, but medium-term technical studies show room for weakness back towards the $900-1,000 area ahead of the bull trend. We will look for an opportunity to sell into some strength up to the 50 per cent fib retracement off of the latest $1,225-1,075 move which comes in at $1,150. Sell at $1,150 for a $1,000 objective; stop $1,235.
My pick: Short Silver below $17.50
Expertise: Global Macro, Classic Technical Analysis
Average Time Frame of Trades: 1 week – 6 months
Silver has bounced to meet resistance at the top of a falling channel established in early December, now just below $17.50. Silver’s inverse correlation with the fed funds rate has meant that the silver price has fallen as the fed funds rate has been pushed higher by strong economic data in the US. Silver’s bearish bias could persist for the near term. I will look for a bearish reversal below $17.50 to get short, initially targeting the channel bottom at $16.73.