by Martin Chapman

Created on: June 28, 2008   Last Updated: June 29, 2008

NEVER CATCH A FALLING KNIFE!

This old stock market adage is as apt today as it ever was. World Banking stocks are already down over 22% this year and we have returned to level we were at in March 2008, when the Federal Reserve had to the rescue Bear Stearns to avoid a financial meltdown.

So Bank share prices are now lower than they were a year ago. Is that a good reason to buy Bank shares? ABSOLUTELY NOT! The knife is falling and if you try to catch it you will cut your hand.

A VERY NASTY PERIOD IS TO COME

Bob Janjuah, the Credit Strategist at The Royal Bank of Scotland, who predicted the Sub-Prime Crisis last year, recently stated that "a very nasty period is soon to be upon us!" and the bank has advised clients to brace for a full-fledged crash in global stock and credit markets.

All this might lead a contrarian to buy now, but the right time to buy bank stocks will come when all sub-prime exposure has been disclosed, trust increases in bank earnings again and the banks start to write-back their provisions.

The amount of worthless Sub-Prime Paper held by financial institutions is estimated at somewhere between $300 billion and $1 trillion, but nobody knows for sure how much it is and who exactly holds this exposure. Therefore as long as this uncertainty remains, it is advisable to wait for clarity.

NEGATIVE DIVIDEND YIELDS

World Bank Indices show Dividend Yields of 5.5%, which looks more attractive than it has for some time. But US or German 10 year government bonds will give you a yield of 4.1 to 4.6% risk free and Global Investment Grade Corporate Bonds offer a further spread of 2% over government bonds, so why bother risking your money in the Banks.

Moreover, it can be argued that dividend yields for many banks are not even positive. Why? Because Banks are having rights issues worldwide, as they repair their Capital Adequacy Ratios. But if we deduct the capital raised from the dividends paid, we see that many Banking Stocks have NEGATIVE DIVIDEND YIELDS.

Furthermore, it would be preferable if banks were at their more traditional Price/Book ratios of 1 or less, instead of 1.3 times at the moment. This is all the more important as the quality of bank earnings are currently being regarded with scepticism by investors.

CREDIT MARKETS SAY BANKS ARE NOT LENDING TO ANYBODY

LIBOR rates remains stubbornly high and it is clear that banks are currently unwilling to lend to each other. The securitization markets, an important source of financing for many banks, have simply dried

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