Jeremy Warner's Outlook: Banking... the worst may be yet to come

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The Independent Online

Now that Royal Bank of Scotland has banked the £12bn proceeds of its record-breaking rights issue, are the shares worth buying again? It's been a mug's game trying to call the bottom for financial stocks over the last six months. I know, because like others, I've tried to do it, only to see prices continue to plummet into the abyss. In RBS's case, a rights issue which began life as deeply discounted came perilously close last week to being left with the underwriters.

In the event, the price recovered a bit, ensuring a decent, 95 per cent, rate of take-up. In these markets, that counts as a success, so with the bank's capital position now secure, and the threat of a sizeable overhang of unwanted stock removed, are not the shares due a rebound? On a long-term view, RBS and other bank stocks certainly look cheap, but there are plenty of reasons for remaining cautious for the immediate future.

Neither the data nor the newsflow on the wider economy looks like getting better any time soon. To the contrary, all the evidence is of further deterioration. Alarmingly, last week's survey from Halifax showed house prices were falling at a steeper rate than at any point in the last housing slump of the early 1990s. The read through from this adjustment to the wider economy is still far from clear, but it is hardly likely to be positive.

In any case, we may be moving into a second and even more difficult phase of the banking crisis where conventional bad debts and consequent impairment charges take over from where mortgage-backed securities, leveraged loans and monoline writedowns left off. It only requires a modest rise in bad debt experience to decimate the profits.

As it happens, RBS has a relatively low exposure to the mortgage market compared with HBOS and Barclays, but obviously it is highly sensitive to developments in the wider consumer debt environment, and, both in absolute and proportionate terms, its exposure to commercial property is the biggest of the lot. This is bound to be hit hard in the event of a prolonged recession.

For the time being, there is just too much uncertainty out there to think this definitely the bottom. Meanwhile, the outlook for the other three, still active, banking rights issues continues to look treacherous. HBOS and Bradford & Bingley have more than a month left before their rights issues close, leaving plenty of scope for already badly eroded discounts to be completely wiped out. On the Continent, the UBS rights issue again looks to be in danger, with the stock price just a whisker above the 21 Swiss francs at which the new shares have been priced.

The stock market desperately needs some positive news, but it is hard to see where it might come from. The workout from the debt overhang of the last boom looks as if it will be long and painful.