The double whammy facing bank shares

With a bonus pot of up to £7bn, it's been another good year to be a banker with a job. But it's a different story for bank shares, which are being stalked by two fears in particular. Life for the big banks is about to get tough again.

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It's been another good year to be a banker with a job. Estimates of the total amount that UK bank employees might trouser this Christmas vary from about £4.5bn to £7bn. And once again, politicians have to be seen to "do something".

Hence the reported clash between George Osborne and Vince Cable over whether or not bonus payments of over £1m should be separately disclosed. And the warnings from the Treasury that bankers should "think very carefully" about bonuses.

Yet, amidst all the furore, spread betters may have noticed that life for the big banks is about to get tough again. The share prices of the likes of HSBC and Lloyds are being stalked by two fears in particular.

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Euro zone debt

Ireland is the latest EU member to need a bailout. And whilst the exact terms of any handout have yet to be finalised, one thing's for sure it won't be the last. Portugal and perhaps Spain could be next in the queue.

Even the announcement of the creation of a monster €750bn fund earlier this year has failed to quell investor nerves.

And troubled Irish banks have reinforced the worry that there may yet be a whole heap of new bad debts lurking on European bank balance sheets.

China

Beijing is getting more and more worried about inflation. Annual food price inflation, for example, hit 10.1% in October a level not seen since mid-2007.

Many attribute rising prices to the huge lending binge that state controlled banks embarked on over the last two years. So now China is reacting.

Last week, reserve requirements were lifted for banks for the fifth time this year. In short, that makes it more difficult for them to lend. And aside from the risk to Chinese, and therefore global, growth from such a move, China is far from the only country facing inflation.

Once other central banks start reining in quantitative easing - and even reversing it - life will get tougher for many commercial banks that have become used to trading using next to free money.

So, while bankers have made hay and enjoyed bumper bonuses on the back of Chinese growth and Western funny money, don't bet on them being able to ride either wave for much longer.

Tim Bennett

Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.

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