A short look over the news from the last 6 months shows that the US banks have received hits after hits. Almost all of them reported huge losses on the subprime crisis:
Citibank was among the first when the bank announced on Nov 5th, 2007, losses of US$ 11 billion based on its subprime exposure. In the first quarter of 2008, these losses were confirmed to be at US $ 9 billion, with the threat of other substantial losses in Q2 (which until today failed to materialize). Two months later Societe Generale, a French banking giant, announced a US$ 7 billion loss on its trading operations, which was again hitting hard the banking market.
Merrill Lynch reported mortgage-related losses and write-downs totaling $24.4 billion in 2007
Then on June 17th Lehman Brothers announced its first ever loss since its public listing of US$ 2,8 bln, based on the US$ 3,7 bln write downs on the 2nd quarter. Of course its shares went down on this announcement to $27, below their bok value of $ 33. And the story goes on and on, without an ending foreseen for the incoming future…
Lehman Brothers Inc analyst Jason Goldberg said the largest U.S. banks could post $79 billion of credit losses this year, 30 percent more than he had previously forecast and more than twice the year-earlier level, with many of the problems stemming from the real estate.
Across the debt and equity markets in the United States, both the numbers and sizes of the deals (by which the financial servies are measured) were down on the year before — in some cases dramatically.
High-yield debt issuance was down 59 percent on the first half of 2007 and deal size was down 68 percent. Investment grade issuance was also down close to 50 percent, although total deal size for the first half of the year — at $4.8 billion — fell only just short of the $5.25 billion this time last year. IPOs, meanwhile, picked up somewhat on the first quarter, but with only 14 deals this quarter, activity is still at multi-year lows.
All these bad news are reflected in the Financial Times rankings for the 2007, where 7 out of the top 10 banks and financial services companies dropped both in ranking and in market capitalisation:
|Rank||US rank 2008||US rank 2007||Name||Sector||Market value $ m|
|1||10||6||Bank of America||Banks||168.404|
|2||12||14||JP Morgan Chase||Banks||145.881|
|5||34||31||Goldman Sachs||Financial Services||65.480|
|8||51||46||American Express||Financial Services||50.544|
|9||52||32||Morgan Stanley||Financial Services||50.512|
|10||56||102||Bank of New York Mellon||Financial Services||47.629|
Given the current losses outlook which most of the analysts put away on public for these top 10 US banks and financial institutions, doitinvest.com would not reccomend buyng such shares for those with a weak stomach. The risks are very high and although the current share prices are quite low, we might not have seen the worst yet. However, the biggest hits have been already taken onboard on our humble opinion, unless there are more things we don’t know about…
So what does this doitinvest analysis mean for your investing strategy? First of all don’t jump at buying shares from the bank sector just because the shares look undervalued. Look carefully at the news and try to make some sense of them.
Secondly, if you are risk avers, stay away of the bank and financial services US shares for the moment. They are quite volatile…