Anyone who picked up battered banking shares earlier this year can be forgiven for feeling a little smug – RBS for example has risen over five times from its March low whilst for Barclays it’s more like seven times. But if you haven’t already done so, the International Monetary Fund (IMF) just gave plenty of reasons to take profits.
In its latest Global Financial Stability Report it warns that banks have so far only recognised $1,300bn of losses from a total estimated at $2,800bn. Worryingly, eurozone and UK domiciled banks are worse off than US banks, having “only recognised about 40%” of losses, compared to 60% for their counterparts across the Atlantic.
And although banks have been enjoying a mini-boom as markets have risen and companies have paid them hefty fees for underwriting share and bond issues, the IMF warns that this “golden period” is coming to an end.
“Banks are likely to suffer reduced margins from paying more for deposits,” as competition to attract savings to boost capital and meet regulatory requirements hots up. Meanwhile, they will incur “higher interest costs” once this period of unprecedented low interest rates and money printing (quantitative easing) ends and even reverses – perhaps as soon as early next year.
Finally, the IMF warns that, of all the economies it surveys, the UK “appears most susceptible to credit constraints” given the dual strains of shrinking balance sheets and huge public borrowing. So while another Lehman-style collapse may have been averted so far and several banks seem to be in party mood again, the IMF’s message is clear – it won’t last. So locking in some of those gains right now before the party ends, seems a wise move.