Bank shares a good buy?

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fnannery

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I was thinking of investing about €5000 in shares of one of the irish banks as they seem to be a relatively low price compared to the last few years. Is now a good time especially after the recent credit squeeze, Northern Rock drama and Cowens warning of economic slowdown etc? Any views?
 
I'd disagree somewhat with the view on other defensive options. Most of the banks in Ireland and the Uk are valued at historically very low prospective P/E multiples and generous dividend yields. We can't discuss individual shares but one major UK bank with a very diversified business model is trading at 1.1 book value and offering a 6% yield. Obviously the UK and Irish housing markets have peaked and this may affect prospective earnings but the economies are doing fairly well still and I think a reversion to average historical valuations voes offer some upside. It depends on the term of your investment. I would expect things to be rocky for a while and if you needed to pull out the money quickly sometime in the next few months I'd stay out but I reckon a year from now prices will be up 30%+. I'm not a professional investor though so I too would welcome any further views especially seeing as I recently took a punt on some of the banks about a month ago!!
 
I would think that any of the Major banks, which pay out a decent dividend of around 3 to 4 percent are a steal at present. Historically this is a rocky time in shares, but how many of these periods have we had even in the last five years. So at least you will get your dividend which is often as good if not better than deposit rates. The banks will make money whether the economy goes well or bad. They have your money on deposit at 1 per cent and are loaning it at 7 percent, How can they lose ? They have your assets if anything goes wrong.
 
mercedes1 said:
I would think that any of the Major banks, which pay out a decent dividend of around 3 to 4 percent are a steal at present. Historically this is a rocky time in shares, but how many of these periods have we had even in the last five years. So at least you will get your dividend which is often as good if not better than deposit rates. The banks will make money whether the economy goes well or bad. They have your money on deposit at 1 per cent and are loaning it at 7 percent, How can they lose ? They have your assets if anything goes wrong.
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Actually many of the major banks both here and in the UK are paying dividends well in excess of 3 to 4 percent at current valuations. The question is, can these dividends be maintained?
 
How can they lose ?
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Plenty of ways. See Northern Rock for an example. If banks were guranteed money makers the market wouldn't be discounting them right now.
 
They maybe trading at low valuations on P/E ratios but price is instant today's price which is low having dropped alot, but earnings are historic ie the last financial year which would be 2006 where earnings were high, i am not certain about this but i am pretty sure this is the case, so i think the P/E ratios will rise alot next year when this years earnings are used.
 
also low book values with banks are hard to quantify as most of their assets are also financial and not hard assets like plant and machinery. If there was large scale loan default then the value of their assets would drop alot
 
also the banks have risen almost constantly for the last 10 years, this is the first big drop. Usually when an asset that has been rising alot for a long time falls out of favour it takes a few years for the trend to turn back around again. I would say there will be a few flat years for bank investors
 
The markets are discounting practically all shares right now. This is simply the fear factor and has little to do with the performance of the companies concerned. Historically the banks have been one of the blue chip and safe shares. I see no reason why they will not continue to be. The dividend again is a huge bonus. These valleys in the market will always happen
if you look at the graph over the last ten years, there are several such valleys. It does take courage to buy at this time, but the main fear is that the shares will drop some more. This is also quite possible , but it is most
likely that within two or three years whoever buys now will be sitting on a handsome profit. Meanwhile while waiting for this to happen, you will get your dividend of 3 or 4 percent. How bad is that !
 
mercedes1 said:
How can they lose ? They have your assets if anything goes wrong.
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they lose if they can't sell the assets they reposess, as is happening in the US sub-prime market.
part of the reason irish bank shares have dropped is that foreign investors see the risk of the same thing happening in ireland and have bailed out after making their money over the last few years. they won't be back until the property market looks like recovering.
banks are on low PEs at the moment and as a 3-5 year investment you should do well (if prices follow historical trends) and you will have your dividend payments in the meantime (but don't forget you will be taxed on these & prob at the higher rate).
 
The ISEQ itself is an ugly buy right now until we can see the end of the current changing forces in the housing market. End Q1 next year will tell a lot. I expect lots of volatility in Bank stocks until then and if they fall again aggressively where the dividend yield is a premium to deposit rates get in a fill your suitcase with bank shares.
 
Personally I don't pay quite as much attention to historical P/E values. As Warren Buffett puts it, that's like investing looking in the rearview mirror. For companies that have had a decent history of making or even beating realistic growth forecasts (positive or negative forecasts) I would focus on prospective P/E. It is on this basis that bank shares look particularly cheap at the moment.
A useful figure to look at is the PEG ratio. This is the ratio of P/E to growth rate in EPS and relates how the share price has tracked growth. If the trend in PEG ratio and the forecasting history look consistent over the last 5 years and the PEG (which is 1 if PE and EPS growth rise at the rate) suddenly has dropped from 1 or 0.9 to 0.6 then this implies that maybe the share is bargain. all this of course assumes that there isn't a huge instant shock like huge oil price spike from a war in Iran.
I don't think this credit crisis is all that bad. There may be a few downgrades in America as the foreclosures rocket but like the London bombings didn't create anything like the ripple of 9/11 in the markets, the market will come to expect these and eventually will not respond as much. it will take 2-3 years to weed out the teaser rate mortgages and then business as normal. This level of lending stupidity never quite caught here and in an economy still growing strongly the outlook for the banks is still good.
 
I agree that the banks here are not going to be caught up in the subprime lending that has happened in the states. Property will always sell in Ireland, there is not a lot of it around. Okay the prices have dropped and may have to drop a bit further, but there will be plenty there to buy it if prices drop a bit further. I believe that by next Spring things will start to pick up again. As I have stated earlier historically the bank shares are blue chip and the dividend is a nice bonus. Personally , I will wait for another drop and then buy some and leave them there.
 
Whatever about PEGs, P/e's, Eps etc are any other financial measure, the reality is the banking stock is a no no [for me anyway] in this present cyclical stage. It has been dumped by the market for a reason, anyone looking for a flip better say their prayers. There are much better sectors in the next 12 months which do have not the same level of volatility but offer prospects nonetheless for growth. Not necessarily in the ISEQ though. Look at technology instead for example amongst other things Wimax versus 3G.
 
nobody here is looking for a flip as I see it. More a buying oppotunity for the long hold. If you think that you can time the turn on this run better fire ahead and the best of luck. As I see it there will be volatility for a while and nobody knows how long. Banks in this country have rarely enough traded on such appealing multiples. If the valuations have dropped at moment to a level that practically the man on the street and his dog can see is excessive for the amount of exposure the Irish banks have to the credit crunchsurely this is the time to buy surely. Many analysts see up to 40% upside in 18months on them. Thats good enough for me. Buy when there's blood on the street as they say. I accept that in the next 6 months it is possible that the volatility will take some of the gains out but the real risk is that they would gradually drift slightly higher all the time and before you know it a decent chunk of the inevitable bounce back has happened under you nose. Another little nugget from Warred Buffett on that was "Shares turn amid pessimism, rise amid skepticism, mature amid optimism and fall amid euphoria " I know where I'd like to be in that.
 
The banks have basically rode the celtic tiger up for the last 10 years, but the celtic tiger is dead and we are left with the irish economy, ireland has basically followed the US economy for the last 10 years even mimicking the temporary recession in 2001 and the following boom. However ireland is now in a very different place than the US even though they have both suffered housing downturns, the US is now cheap with the cheap dollar and will get cheaper, ireland is now expensive with the euro and will get more expensive. This means that there will be a recovery in the US because it is becoming more competitive but not in ireland. All the indicators lead to significant job losses in ireland because of how expensive we are with the euro especially for american companies. The housing market is more dependant on jobs than on anything else, i expect unemployment to rise significantly, that means housing will not pick up which means the banks earnings will be go down. The P/E ratios of 7 look very attractive but remember this years earnings and next years earnings are not yet known, the earnings used in the calculations are historic and will not be updated until next year, then the real story will start to be told
 
Another little nugget from Warred Buffett on that was "Shares turn amid pessimism, rise amid skepticism, mature amid optimism and fall amid euphoria

Pardon my pedantry but the exact quote is “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria” and it was said by John Templeton, not Buffett.
 
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