Banks back at the forefront of market action

Recent excitement in the sector included a sharp rebound by shares in German giant Deutsche Bank (DBK). When DBK’ shares have suffered markedly, falling to 30yr lows as markets fretted about its ability to pay back debt. However, the stock has subsequently delivered a strong 15% bounce off its lows following confirmation that the bank was launching a buyback of $5bn of its own debt – seen as a demonstration of financial strength by the markets. The bank reacted, giving the markets a buying opportunity.

Shares in European  peer Commerzbank (CBK) jumped sharply after its FY15 results came in better than expected (with profits quadrupling), allowing it to reinstate its dividend after a five-year hiatus and plan for a 40% pay-out ratio in the mid-term. Remember when Lloyds Banking Group (LLOY) reinstated its dividend back in 2015?

Stiff headwinds – but are they now priced in?

Negative interest rates from an increasing array of central banks (Denmark, Sweden, Eurozone and now Japan) is not helping the sector sentiment either, threatening its simple business model – take deposits from savers and lend them out to borrowers, charging the latter more than you pay the former.

Profitability was already under pressure from regulators allowing less risk taking post-crisis, but now you have the very real possibility of clients withdrawing savings, meaning far less money to lend out. Not good for the bank or the economy. After all, who wants to lose money on their savings when a mattress will at least give you back what you hide under it?

Still, it’s at times like this that the smart money comes out and starts buying. February has seen safe haven Gold come off highs as sentiment appears to be going risk-on. While many in the markets are fearful right now, might the time have come to start looking for those shares with the biggest recovery potential?

Attractive share price moves await

Bank shares are seldom static at the best of times, with the institutions exposed daily to a host of global drivers and events.  Reporting season will be no exception. Are you aware that the likes of Barclays, Lloyds and HSBC have an average results day trading range of over 5%? That is the scope for share price action that short term traders crave.

On top of this, since LLOY, BARC and HSBA last reported (Q3 2015) their respective share prices have fallen by up to 34% on the back of continued equity market turbulence and Macro-economic uncertainty. Since we’ve known about the fundamentals for so long, could the banking sector be nearing, or indeed already in, oversold territory? Is now the time to seriously start looking at the banks again?