Today’s rally in the shares of banks such as Lloyds Banking Group, RBS, Barclays and HSBC should be used to get out of them.
Investors in these banks are exposed to huge counterparty risk, not least of which relates to mortgages. As reported by Morgan Stanley last week, Lloyds is the most at risk from falling house prices, principally due to higher loan losses. The bank is also having to shell out £3.2 billion in compensation over the mis-selling of PPI. Morgan Stanley is predicting that the banks profits will fall 21% before tax.
The UK banking sector as a whole is also highly exposed to losses from the sovereign debt crisis affecting the PIG countries of Portugal, Ireland and Greece. Their exposure to Ireland is a staggering £209 billion – the highest of any country. Of the UK banks, Lloyds has the second-largest exposure to Irish Republic with £27 billion of loans outstanding.
The exposure of UK banks to Portugal is around £30 billion with Barclays among the biggest holders of loans, a total of £2.7 billion. Royal Bank of Scotland also has significant exposure, having lent Portuguese companies £611 million.
The shares of Lloyds Banking Group [LON:LLOY] are already down by more than 37% since September 2010 and although many say that they are a “safe bet” because they are backed by the government/ taxpayer, that doesn’t mean the shares can’t fall significantly more.