There’s more pain and selling to come for banking stocks

EACH time that European banks have taken a step towards recovery since autumn 2008, it seemed that they suffered another a setback. Whether it was revelations of bad debts, government bailouts, exposure to indebted sovereigns or tighter regulation, it has been hard for their share prices to make sustained headway.

The second bout of the Eurozone sovereign debt crisis, this time with Ireland at the centre of the markets’ attention, has been no exception. Statistics about each European bank’s exposure to Ireland (and Spain and Italy and Greece) have been wheeled out again.

Like temperatures across Europe, banks’ share prices have plummeted. The Stoxx Europe 600 Banks index has fallen steadily since early August and it has dropped some 9 per cent since 4 November.

RBS has plummeted some 17 per cent since 4 November while Societe Generale has sunk 15.82 per cent over the same time frame. Even Standard Chartered, a bank with minimal European presence, has seen its share price fall by 10.36 per cent.


EXTREMELY OVERSOLD
Evolution Securities’ banking analyst Arturo de Frias last week reiterated his view that the sector “looks extremely cheap, and also very oversold recently”. The sector is currently trading on 7.9 times 2012 earnings and returns are expected to improve in 2010 and again in 2011 and 2012, de Frias added.

But does that mean spread betters should be looking to buy at these levels? Not if you are taking a short-term directional view, at any rate. “I am not saying that this is the bottom: acute sovereign fears can become extreme sovereign fears before we reach the bottom,” de Frias says.

Angus Campbell, head of sales at Capital Spreads, agrees, saying: “I wouldn’t want to say they are a buying opportunity until the European situation has completely resolved itself. Banking shares are going to remain under pressure for the time being.”

However, he adds that although Barclays is exposed to Spain to the tune of £35bn, there appears to be a bit of a buying opportunity materialising in the stock. Barclays is currently trading at 260p and Campbell points out that there is a clear support level in place at 250p, which should reduce the downside risk of the trade. However, if you do choose to go long on Barclays, remember to place your stop loss just below this support level because if it falls lower from there, then that’s it.

But spread betters looking to profit from sharp intra-day moves will be pleased to hear that these periodic episodes of extreme volatility for the banks are unlikely to disappear any time soon. Day traders with nerves of steel should look to be nimble and jump in and out of relief rallies.

Just don’t make the mistake of dashing for cheap stocks purely because they’re cheap – sometimes they deserve to be the price they are.