The current falls in the prices of bank shares are widely covered in the financial media. However the overall pattern and scale of the decline in market evaluation of banking shares is still not sufficiently frequently drawn together. The aim of this note is therefore to show this pattern in clear terms. It reveals market estimations of a second wave of major bank share price collapses. This is particularly significant as it follows a lack of recovery of the first wave - i.e. there is a clear pattern of a spreading pool of 'collapsed' share prices of major banks. The cases of Barclays, Bank of America and Société Générale in this wave will be looked at in particular in comparison with the earlier cases of Citigroup, RBS and Lloyd's Banking Group.
The 1st wave of bank share price collapses
The overall features of the wave of bank collapses in 2008 is too well known to need rehearsing here. Attention is simply drawn to the fact that, in addition to the formal bankruptcy or takeover of investment banks (Lehman Brothers, Bear Stearns, Merrill Lynch), a series of very large retail banks were left in a state which, from the point of view of their share prices, means they may be regarded as ‘collapsed banks’ – ‘collapsed’ for present purposes being defined as having suffered a fall of more than 90% in share price. These share prices may also be regarded as 'collapsed' in the sense that no significant recovery has taken place.
Attention is drawn to these features as there is sometimes an implicit assumption that share prices in these banks may have recovered at least to some degree in line with the overall recovery in share prices. This is clearly not the case.
Figure 1 therefore shows the share prices for three of the largest such banks – Citigroup, RBS and Lloyd’s Banking Group. The share prices in all these banks rapidly fell by around 90% during the financial crisis – the falls beginning, as a leading indicator of the coming crisis, in all cases between December 2006 (Citigroup) and February 2007 (RBS and Lloyd’s Banking Group). To make possible international comparisons, as with other banks considered here, share prices have been converted into dollars using daily exchange rates.
Figure 1 shows clearly the 1st wave of collapses in bank share prices and that no recovery has taken place from it. On 9 September 2011 the shares of Citigroup had fallen by 94.8% from their peak, the shares of Lloyd’s Banking Group had fallen 95.9% and the shares of RBS had fallen 97.6%
The 2nd wave of bank share price collapses
The significance of the new current wave of severe bank share price falls is illustrated in Figure 2. This shows that the share prices of a further series of very large banks – Barclays, Bank of America and Société Générale are analysed – had initially suffered falls in share prices during the financial crisis which were as large as the first group of ‘collapsed’ bank share prices. However unlike the first group this second set of institutions had undergone a genuine recovery in share price. What is now significant, therefore, is that the recent share prices of this second group are now falling sharply downwards towards the level of ‘collapsed’ banks – i.e. a second wave of very large banks are being pulled into a maelstrom of share price collapses.
Specifically, for the banks considered above:
- Barclays share price, after peaking in February 2007, by 23 January 2009 had fallen by 95.5%. By 17 September 2009, however, Barclays share price had recovered to to 59.3% below its peak. By 9 September 2011 Barclays share price had again fallen to 85.3% below its peak level – i.e. a second wave of severe share price falls had set in.
- Bank of America’s share price, having peaked in October 2007, by 6 March 2009 had dropped by 93.4%. It then recovered to 61.1% below its peak by 14 October 2009. By 9 September 2011 however its share price had again fallen to 85.3% below its peak.
- Société Générale’s shares, having peaked in May 2007, by 9 March 2009 had fallen by 88.3%. They then recovered to 58.8% below their peak by 29 September 2009. By 9 September 2011 they had fallen to 87.9% below their peak.
The share price pattern of these banks is therefore common. They reached low points early in 2009 before recovering by autumn 2009. Since then at first a slow, and now rapid, renewed decline in their share price has taken place. In other words the market judgement is that a new wave of severe share drops of major banks – including Barclays, Bank of America and Société Générale – is taking place down towards the level of the 1st wave of ‘collapsed’ (in terms of share prices) banks, that is Citigroup, RBS and Lloyd’s.
In order to show this pattern Figure 3 shows the share prices of both the 1st and 2nd wave of share price falls in the banks considered.
Severe price falls, by normal standards, are of course taking place for most other banks – including Goldman Sachs, Deutsche Bank, HSBC etc – but these cannot be said to be approaching the level of near 90% falls for the banks analysed above.
The conclusion of the above trends is evident. Bank share prices show a clear pattern of two waves of ‘collapse’ among large retail, or retail/investment, banks.
- The 1st wave saw falls of 90% plus in the shares of banks such as Citigroup, Lloyd’s and RBS. No significant recovery in their share prices has taken place since – which is why they may, in terms of share prices, be characterised as ‘collapsed’ banks.
- A number of other large banks – of which Barclays, Bank of America and Société Générale may be taken as examples - initially suffered very severe share price falls during the international financial crisis but then saw a significant recovery. Their share prices are, however, now again falling towards the level of the 1st group of banks. It, of course, remains to be seen whether this trend will continue, but a current tendency of a 2nd wave of banks being drawn into crises which essentially destroys share prices is clear.
The market therefore clearly judges that the pool of ‘collapsed’ banks, in terms of share prices, is threating to spread in a second wave.