Opportunities and risks in UK banking stocks

A financial expert has said that banking stocks in the UK and Europe offer both the potential for profit and significant losses at the moment.

New Star''s Guy de Blonay explained that some had believed that the financial market crisis had effectively come to an end with JP Morgan''s Bear Stearns rescue in March.

However, he added that UK and European financial institutes had "surrendered the bulk of their gains as investors have focussed on the earnings challenges facing the banks".

Mr de Blonay added that investors have grown increasingly concerned that bad debts could continue to force banks to write-down profit expectations and that share prices could suffer as a result.

However, the expert suggested that low valuations of some lenders could present investors with opportunities. He said that Royal Bank of Scotland and HBOS have already "been punished by investors for their mistakes" and that this meant they had become "among Europe''s cheapest banks on many valuation metrics".

As a result, Mr de Blonay said: "The question now is whether low valuations offer a sector-wide buying opportunity or whether greater selectivity is needed in the face of longer-term uncertainties."

"While raising capital, many financial institutions are also putting their non-core businesses up for sale. This could boost takeover activity as well-capitalised banks pick up solid businesses at cheap valuations. HSBC, Standard Chartered and Banco Santander are seen as potential bidders."