Personally, Ive never been a big fan of banks, theyre just too difficult to understand. Many other market participants share this view, including Terry Smith, who used to be one of the Citys most respected banking analysts.
However, while Im cautious about the banking sector as a whole, there are three banks in particular that I believe all investors should avoid.
Standard Chartered(LSE: STAN) is at the top of my list. I have praised Standard before but no its becoming clear that the banks troubles are spiralling out of control.
Standards management announcedthat totalimpairment charges, or bad debts during the third quarter had jumped to $539m, more than double the figure reported for the same period a year ago. Total impairments for the year to the end of the third quarter hit $1.6bn andoperating profit for the quarter fell 16% year on year.
Unfortunately, its possible that another wave of impairments could be about to hit the bank, causing crippling losses. Specifically, management noted that third quarter impairments were a result of:
a small number of accounts, primarily in the Corporate and Institutional Clients segment, some of which have been affected by weak commodity markets
Since the third quarter commodity prices have only deteriorated, implying that the bank is set for further losses as clients struggle with adverse market conditions.
Banco Santander(LSE: BNC) (NYSE: SAN.US) is attractive due to the banks hefty dividend yield, which currently stands at 8.3%. However, Santander is being shaken to the core by its newexecutive chairman,Ana Botn as she reshuffles the management team.She has appointed a new CEO, Jos Antonio lvarez, a veteran banker who knows Santander inside out and is highly respected by the banking community.
Mrlvarez used to hold the position of CFO at the bank and his promotion has sparked rumours that Santander is about tostrengthen its capital structure, or reshuffle its financial strategy. Simply put, financial analysts, both here and over in Spain, believe that Santander could be about to announce a dividend cut, capital raising, or asset sales to bolster its financial cushion.
So, for the time being Santander should be avoided until managements overhaul is complete.
Bankers cant count
And lastly,Royal Bank of Scotland(LSE: RBS) (NYSE: RBS.US), which has failed investors constantly since 2008. The banks latest failure, was the admission that the numbers used for the European Central Banks stress tests, conducted this year, were wrong. Indeed, the original figures supplied by RBSsuggested that the banks tier one ratio would fall to 6.7% by 2016, in an adverse situation a three year simulated period of stress comfortably above the minimum figure required of 5.5%.
However, a few weeks later the bank admitted that it had miscalculated the figures. After recalculating,RBS revealed that its stressed capital ratio was in fact 5.7%, not the previously stated 6.7% a huge miscalculation.
This revelation has left me wondering, if RBS cant get its figures right for one of the most anticipated events of the banking calendar, how many times has the bank made this mistake in the past? Moreover, whats to stop the bank making more mistakes like this in future?
Don’t take my word for it
But don’t just take my word for it, Istrongly suggest you look a little closer at Standard, Santander and RBS before making any trading decision.
Placing a valuation on banks is never a simple task, and to help you conduct your own analysis, our analysts here at the Motley Fool have put together this free report entitled,“The Motley Fool’s Guide To Banking”.
ThisexclusiveFREE wealth reportprovidessix key ‘City insider’ valuation metrics for each bank traded in London. That’s right, the report gives a rundown of the whole industry.
The results are surprising — and revealing. This report isfreeandwithout obligation. To get your copy,click here.
Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.