Banking on more world market uncertainty

Anyone hoping for a weekend fix to the global banking sector will have to wait a little longer - perhaps a lot longer.

The Group of 20 finance ministers are rethinking how to move forward on bolstering the biggest banks, the ones whose failure would cause the greatest threat to the global economy. Bloomberg is reporting that a list of as many as 50 banks will be prepared over the next few weeks.

In their post-meeting statement, the ministers said: "We remain committed to take all necessary actions to preserve the stability of banking systems and financial markets. We will ensure that banks are adequately capitalised and have sufficient access to funding to deal with current risks.

"Central banks have recently taken decisive actions to defend, and will continue to stand ready to provide liquidity to, banks as required. Monetary policies will maintain price stability and continue to support economic recovery."

Not everyone though thinks that the finance ministers are looking in the right direction. Many bankers and investors say the issue remains first and foremost the sovereign debt crisis and Europe continues to struggle to get ahead of that curve.

"Recapitalising the banks is not the solution," Justin Bisseker, a bank analyst in London for Schroders, Britain's largest independent money manager, told Bloomberg. "Sovereign risk is the principal concern. Once investors' confidence in sovereigns returns, then confidence in the banks will follow."

The latest round of meetings doesn't alter the focus this week, which is expected to confirm a rough earnings season for banks in the US as well as in Europe.

Unlike several years ago, the banks are finding themselves in dire straits not because of poor lending practices per se. It's hard to make money when it's not being lent out and when companies and consumers are wary of what the future holds.

And more recently, the banks' balance sheets have been hammered because of holding government securities, and if anything, the EU seems to be heading towards further haircuts for banks holding sovereign debt. It's a vicious circle.

Several banks already have had their credit ratings cut and more are in line for the same. Fitch last week put Barclays Bank, BNP Paribas, Credit Suisse Group, Deutsche Bank, Societe Generale, Bank of America, Morgan Stanley and Goldman Sachs Group on notice for further possible downgrades.

As a measure of how difficult the current environment is, earnings are pending this week from Citigroup, Goldman Sachs Group and Wells Fargo and no one is really looking forward to them. Banks have entered a new retrenching phase. Any uptick in profits seems delayed until at least next year.

That said, there is some room for optimism that some non-financials will help counter some of the gloom as Google did last week. IBM and Apple are expected to report solid profits on Monday and Tuesday. There's a raft of others on deck too: Coca-Cola, Intel, American Express and Microsoft. Apple is widely expected to extend its domination, with sales of its latest iPhone surging the last few days even though initial reviews were a bit downcast.

Profit for S&P 500 companies will climb 17 per cent in the third quarter and rise 18 per cent to a record US$99.77 for all of 2011, according to analyst estimates compiled by Bloomberg. The S&P 500 is trading for 11.1 times forecast earnings for 2012, compared with its five-decade average of 16.4 times reported income, according to data compiled by Bloomberg.

It's time to "extend risk," Jonathan Golub, chief US market strategist at UBS, wrote in a note dated October 10. "As macro concerns subside, stocks which have experienced the greatest price declines are likely to snap back the quickest."

So while you may not want to bank on the banks, opportunities are emerging.