FTSE Betting | FTSE 100 Companies

The banking sector has suffered considerably at the hands of the global credit crunch, with more losses widely expected in the coming months.

Banks have been forced to make billions of pounds' worth of write-downs over the past 12 months due to various downturns in the global economy, slashing the value of share prices as a result.

However, our research analyst Anthony Grech has considered the implications of a period of strong fundamental support, which may help traders identify the bottom of a cycle and assess whether current valuations are attractive, when compared to those in the previous downturn in 2000-2002.

Below is a summary of the latest free report from IG Index. You can access the full version in the TradeSense Databank found in the PureDeal platform.

Banks still struggling

UK banks have suffered a large number of write-downs in the last year, due largely to devalued sub-prime related securities. And, although billions have already been wiped off balance sheets, there remains the view that further losses are in the pipeline, adding further downward pressure on share prices.

A recent analysis of the performance of seven FTSE 100-listed banks revealed that five out of the seven halved in value in just one year; Alliance & Leicester was valued at 74% less than the previous year, while HBOS recorded a 73% decline.

Bank fundamentals

By considering the price to earnings (P/E) and price to book (P/B) ratio for FTSE 100 banking shares, we can see that many banks are trading at significant discounts to their book value. A low P/B multiple - as seen with most UK banks - shows that the market does not feel the company is worth the value of its net assets.

Banks are currently exposed to rising bad debts due to sub-prime issues and the slowdown in the property market, while their complicated structured securities are hard to value and carry an element of leverage. Investors are fully aware of the potential dangers even small adverse movements can have on share prices, forcing significant discounts on many banks' book value.

However, with the current lowest P/E and P/B multiples of banks already trading lower than the bottom ratios of 2000-2002, this lack of a fundamental support level indicates that investors may be giving less weight to these multiples than they did in the past. Could this mean the sector has yet to bottom and there is more downward momentum for banking shares? If so, there could be the opportunity for the survivors of this downturn to provide excellent investment potential in the coming years.

Banking on the future

With IG Index you are able to capitalise on your views on FTSE 100 banks, whatever direction you see the market heading in. If you believe the market has more downside to come, you could go short on a wide selection of banking sector shares.

Speculators who feel that banks may be set to recover from the credit crunch-fuelled downturn could go long, and back their theories with banking shares and a range of banking related instruments.

Take a more in-depth view on the banking sector with our specialised report from IG Index analyst Anthony Grech, available to all clients. Apply for an account and get set up in minutes.

The above comments do not constitute investment advice and IG Index accepts no responsibility for any use that may be made of them.