After going bullish on bank stocks in April, two months ago I said most of the upside in bank shares was priced in. Since that time, shares have traded sideways to down. I expect this trend to continue as headwinds like another wave of writedowns in the housing sector is felt. Credit Suisse came to similar conclusions at just the same time, cutting estimates for the sector across the board.
After The curious thing about this was Goldman Sachs. They upgraded the entire sector – this, despite a monster run-up of over 100% in bank shares (KBW index). Who are they kidding? Why would you advise buying shares after they have run up 130%. That makes no sense whatsoever. Chris Whalen, a noted bank analyst at Institutional Risk Analytics, was “astounded” that Goldman would upgrade Capital One and Wells Fargo when the banking industry is headed into the storm.
So when I saw the headlines at the Irish Independent about Bank of Ireland today, I was astounded. headline number one reads, “Bank of Ireland’s hybrid debt downgraded by Standard & Poor’s.” And the story reads:
Bank of Ireland’s hybrid securities were downgraded by Standard & Poor’s on concern the European Commission may demand the lender defer payments on some of the notes as a condition of receiving state aid.
S&P cut its rating on all the bank’s hybrid notes by three steps to CCC, eight levels below investment-grade status, the ratings firm said in a statement today.
Bank of Ireland received €3.5bn from the Government to shore up its capital against losses on property loans. It submitted a restructuring plan to the European Commission, which must approve the state aid, in November.
Allied Irish Banks, which also got state support, said yesterday it would defer payments on some securities after a request from the European Commission.
“The EC has, in our view, developed a track record of requesting that stressed banks in receipt of state aid and subject to restructuring plans should not make coupon payments on their hybrid capital instruments unless under a binding legal obligation to do so,” S&P said in the statement.
A downgrade to CCC is pretty severe. This is where you head before bankruptcy. Sure the downgrade is on hybrid securities only but you can’t see this as a net positive. Meanwhile just hours earlier, the Irish Independent ran this headline, “Bank of Ireland gains as Goldman Sachs raises rating to buy.”
Bank of Ireland rose as much as as 4.9pc in Dublin trading after Goldman Sachs raised its rating on the stock to "buy" from "neutral."
The stock rose as much as 8 cents to €1.70, and traded at €1.67 at 10:56am in Dublin trading.
Meanwhile, Standard & Poor’s Ratings Services cut its ratings on deferrable capital instruments issued by Bank of Ireland to CCC from B for instruments without voting rights, and from B- for instruments with voting rights.
That’s right. Goldman says buy; and the article points to the S&P downgrade at the same time. So, I ask myself why Goldman is upgrading bank stocks when everyone is downgrading them. Just Monday the bad bank set up by the Irish government took 28 billion euros of toxic assets of the books of Bank of Ireland and Allied Irish (AIB). So, the banks have a cleaner balance sheet. I haven’t seen Goldman’s report. But perhaps Goldman believes that the hybrid securities are getting stuffed because of competition rules enforced by Neelie Kroes in Brussels, but that the equity shareholders are expected to profit.
It’s a head scratcher nonetheless. For what it’s worth, Goldman did cut AIB’s price target from 2.57 EUR to 1.80. So, I’ll hold my suspicions of ‘pump and dump’ until I get more colour.