UK banks are poisonous

I am currently reading through Warren Buffet's letters to his shareholders. There are about 30 of them (from 1977 to 2007) and they are fascinating. One of his most famous nuggets of wisdom is his advice that investors should be "greedy when the market is fearful and fearful when the market is greedy."

The market for UK banks is full of fear at the moment. Morgan Stanley released a note today stating that "international investors should stay away from UK banks." It also issued revised price targets for all the major banks. HBOS for example was cut from 715p to 535p.

Bearing in mind that the current price of HBOS is 515p the advice to stay away from UK banks seems a bit strange. Every profitable business has a price and HBOS is currently trading below the heavily revised price target. Shouldn't that make it worth buying?

It is a bit late for Morgan Stanley to advise its clients to stay away from UK banks when their share prices have already halved. It is very easy to write bearish notes about banks in this climate but are there any brokers brave enough to advise the purchase of them?

I think we know the answer to that.

Morgan Stanley also give EPS estimates for the banks. It thinks HBOS will earn 86p per share in 2009. That puts it on a 2009 PE of 6. Pretty cheap by most standards.

Finally, MS also think that we are halfway through the bear market. If we are already halfway through the bear market then I would say now is a great time to start accumulating some beaten down banks.

MS is advising its clients to sell now that the market is fearful - the opposite of Warren Buffet's advice.

Time will tell if I am right to buy UK banks here. But I know whose advice I would rather follow.