Thursday, July 10, 2008

Tust! - Banking

I am being constantly asked whether I think that now is a good time to buy bank share. My immediate answer is, that I am not authorised to advise on investing in shares directly and that they should contact a stockbroker. The definition of what I can and cannot advise on seems to get lost in translation somewhere along the line.

What I usually ask the punter is, 'do you trust your bank?’ The answer is always the same 'No!’ 'So why would you buy shares in a company that you don't trust? I mean, you would not invest money through me, if you did not trust me?'

This usually gives them food for thought, that is, until the next time you meet them and they ask the same question 'Now that they are down another 15%, they must be good value?' 'Sorry, same answer as last time.'

It would appear that there is this perception that there is a killing to be made on these particular stocks. I can only guess that the interest is being whipped up by the ones that are holding on to paper losses and by the 'feeling' that they can't go any lower.

I do not presume to have an informed view on the direction of bank stocks but, for me, a few things just don't add up.

 The original estimates of what the credit write downs might be have been grossly underestimated (translate : have no idea where it will end)
 They are having difficulty borrowing from their peers, so they want you to lend them the money to lend to other clients at higher rates
 Fund managers are deserting them and it is unlikely that the Irish bank stocks will be bought back any time soon
 There seems to be no confidence from any quarter in the banking system
 The staff are in denial as regards how bad things are but they are beginning to feel demoralised &
 Why are there no larger institutions stepping in to takeover the smaller outfits? Surely, it's only a matter of time?

Sometimes you have to rely on your gut feeling. It looks like the handlebars have come off the bike and there is no control or direction, except for a temporary balancing act. You know you are going to get hurt but you try to minimise the pain in the fall.

On the positive side, some good may come of the crisis in the form of changes to what banks can and cannot do in the future. Otherwise, no lessons will have been learnt.

For the record, I would have a similar opinion on Life Assurance Companies and also feel that their existing business model has to be changed. But that's for another day.

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