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Will the ghost of Espirito Santo haunt banking shares?

Will the ghost of Espirito Santo haunt banking shares?

The multi-billion euro bailout of Portugal's Banco Espírito Santo (BES) has highlighted the remaining fragility in some corners of the banking industry and has done little to boost investor confidence in the sector as a whole.

The troubled corporation posted a record loss of 3.6bn euros for the first half of 2014. Increasing worries over the bank’s health have seen its shares plummet 89% in just three months.

The good news, according to Alastair McCaig, market analyst at IG,  is the speed with which the Portuguese government reacted. ‘This encourages belief that this will not be the first of many dominoes.’

But the bad news is that ‘it is disappointing that a European government has once again been called into action,’ he says. ‘With results of the European bank stress tests due out later in the year, it does raise the question of what other banks will require funding, either pre-emptively or on a forced basis.’

The banking industry, even since the passing of the credit crunch, has never strayed too far from controversy. In Britain for example, banks have collectively set aside more than £23bn to deal with the claims over the mis-selling of payment protection insurance.

In 2012 Barclays was hit with a £290m fine for attempting to manipulate Libor, the London inter-bank lending rate, and is currently fighting allegations over alleged ‘dark pool’ fraud.

Since the crisis banks have been through a series of bail-outs and have attempted to repair their balance sheets, in order to get back on track.

From an investment point of view UK bank share prices have come a significant distance since the dark days of the crisis in 2009. Investors who had been brave enough to dive in back then would now be sitting on some hefty gains with shares in Lloyds more than doubling.

Despite the woes of BES, the basic long term investment case for banks has not changed and that there are still opportunities to be had, according to some analysts.

The team at Berenberg Bank recently reiterated a ‘buy’ recommendation on HSBC while the market consensus is pointing to a ‘hold’.

Barclays is in ‘buy’ territory as is Lloyds, with Deutsche one of the institutions backing the bank’s stock.

Ben Yearsley, head of investment research at fund and stockbroker Charles Stanley Direct is a supporter.

‘There will always be isolated incidents and it the case of BES, the authorities dealt with it very quickly,’ he says. ‘The banking sector has been massively under-owned, and understandably so for obvious reasons. But despite the recent problem with BES, looking to the UK, I certainly believe there is an opportunity in the sector for investors, especially as some are paying decent dividends.’

*To August 12 2014 SOURCE: FE ANALYTICS

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