Bank stocks are rising and for a decent reason, they are starting to make a profit again. Banks are an inherently profitable (if inherently insolvent) business and so it is no real surprise that they are back in favour. However the profits to CFD traders and spread betters may be on the down side.

You see, there has been what is generally known as a “relief rally”. Banks are not going through the floor, which is what was assumed, so banks are no longer priced for possible failure. That’s all well and good (although there is still some possible failure) but that is not the end of the story. Banks are actually going higher than they should have gone. Their shares have rallied, due to relief.

This means that bank shares are very vulnerable. Take Lloyds. Until it took over the Halifax Bank of Scotland group Lloyds was actually a very well run bank. However it took over HBOS and then got largely taken over by the British government. The rest is sadly history.

But it’s now in the black. Robert Peston at the BBC has pointed out that the profit that has been made is less than the fall in the bad debt provision. That’s potentially lethal. Effectively if the bad debt estimate – which is an in house effort remember – had remained the same then Lloyds would have still been making a loss. There are some good things, the loss would have been smaller and it probably did make sense to cut the bad debt provision. However it still takes the shine off the profits.

In all banks are probably still vulnerable to a chill wind and may be ripe for a bit of a speculative short.

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