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06 Mar, 2008

By Douglas Bence | 12:26:51 | 06 March 2008

While the banks survived the reporting season with those predicting dividend cuts proved wrong, a later consequence of the sub-prime saga is only just beginning: credit rationing.

'Bank funding is becoming increasingly short-term,' broker UBS says in a note.

'Funding markets remain distressed and the banks are therefore funding short, under one year, introducing an uncomfortable mismatch on 25-year lending as well as increasing the effect if those short-dated markets close.'

However, term funding will not be unavailable indefinitely and asset spreads are widening quickly'. UBS as a result remains a seller of Lloyds TSB which is its least favour stock in the sector. 'Profit before tax fell in 2007, deposit growth was below average, and its retail loan-deposit ration is highest of the clearers, but its two times the price of net asset value is double that of its peers,' wrote analyst Stephen Andrews.

It is, however, a buyer of Barclays, and a short-term buyer of HBOS which has fallen 20% since it published its 2007 results. UBS believes the concerns over HBOS' treasury asset quality have been overblown. The worst Alt-A loans should see cumulative losses of no more than 14%, it says. 'IBOS only starts to lose when losses rise above 30%,' added Andrews who remains neutral on the stock on a 12-month view, but sees scope for a short-term bounce in the share price.

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