Banking stocks may not be as attractive as some fund managers believe, according to Newton Investment Management.
Simon Pryke, banking analyst at Newton, says the credit crunch is far from over and it would be wise to remain bearish on banks.
“I think we’re closer to the start of the credit crunch than the end,” he says, “ and we have little idea how banks’ mortgage books will develop.”
Pryke says buy-to-let lending is a considerable unknown variable at the moment, as no one has experienced buy-to-let lending on its current scale.
“We’ve seen buy-to-let growth from less than 1% of UK lending to over 10% in the last ten years,” he explains.
“The problem is we really don’t know how bad buy-to-let mortgage books are going to get, but I suspect it will be very bad as the risk models created for the market were broken.”
Newton says the high debt to equity ratio of Western banks, with leverage in some cases equivalent to 40x capital, and relatively minor problems can wipe out a bank very quickly.
However, Newton claims investment opportunities exist in emerging markets banks, which are well capitalised with strong deposit inflows.
Pryke says fire sales of non-core divisions by Western banks, such as RBS’s sale of its insurance division, could be positive for banks in Asia.
“Banks in the West want to strengthen their capital bases, but it’s a buyers market at the moment and emerging markets banks could pick up non-core businesses quite cheaply. It would be wise to invest in potential buyers of these companies.”
In the medium-term, Newton expects to see more rights issues by banks, along with dividend cuts, and believes sovereign wealth funds and private equity investors will begin pumping capital into Western banks.
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