Nobody predicted the scale of the collapse. Until the credit crunch began last August, banks were riding high. They had profited by exploiting all manner of financial exotica to boost their earnings. The money was rolling in. Shareholders were happy.

But now the banks are at best unloved and at worst reviled. HBOS, whose shares touched 1,185p early last year, failed last week to persuade investors to buy new shares at 275p and will make a humiliating admission tomorrow that the bulk of its issue has been left in the hands of underwriters.

Barclays, whose shares were well above 600p last summer, struggled to raise £4.5 billion in new capital at 282p a share. Investors accounting for only 19% of shares decided to participate in the offering.

Bradford & Bingley’s value has collapsed, touching a new low this month, down by more than 92% since August. Shareholders last week grudgingly approved a £400m rights issue, but only after B&B chairman Rod Kent was accused of presiding over a “shambles”.

After a rollercoaster week, the FTSE banking sector ended up 11% on Friday. But that masked the real story: confidence in banks has evaporated.

Depositors need have few fears that they will lose their money: there is unlikely to be a repeat of last September when Northern Rock savers queued to withdraw their money.

But people holding shares in banks have seen the value of their investments collapse. Write-down has followed write-down. Around the globe, $400 billion (£200 billion) has been written off. In Europe alone, the leading banks covered by analysts at Goldman Sachs have shed an astonishing $900 billion of market value since the credit crunch took hold last year; write-downs have soared to $134 billion.

And is that it? Is all the bad news now out in the open? Investors’ reluctance to hold bank shares suggests that the repeated reassurances from the banks’ top brass that the worst is now past are being greeted with deep scepticism. The banks’ credibility is bust.

Richard Buxton, head of UK equities at the fund-management group Schroders, said: “For the share prices to be where they are, clearly the market has abandoned any belief in anything that bank managements say. They say they have written off all the toxic stuff, but they have said that before and then had to make more write-offs. Investors are still very wary.

“There is clearly a question of how much more toxic debt has still to be written off. But then there is a further issue: if the economy slips into recession over the next 12 months, how much provisioning will there have to be for traditional lending - the loans to you and me and to companies?”

Karen Olney, chief European equities strategist at Merrill Lynch, said: “There is no doubt that the banks’ balance sheets became very complicated, and their commitments ran into trillions - hence the write-downs. But we do feel that we are largely through the period of shock-horror news. The question now is what banks will do in the future. Banks’ earnings as a percentage of GDP have, until now, gone up enormously but they got involved in some things they should have avoided. What we may see from now on is that for investors, banks begin to look rather more like utilities - rather boring and with low-growth earnings.” THE problems are likely to go beyond the collapse in business in some of the more racy financial products that so boosted banks’ earnings until the credit crunch. Regulators - not just in Britain but around the world - are likely to insist that banks should in future be more prudent in how they value their assets. Greater prudence is likely to mean lower returns.

Buxton said: “There is bound to be a regulatory backlash that moves the goalposts. It may take a long time for the rules to change, but change they will.”

Switzerland’s banking regulator has already intimated that it wants banks to bolster their capital ratios - the amount of equity and reserves held relative to the balance sheet as a whole. In Britain, the Financial Services Authority has made clear that it also expects banks to make their finances more robust - hence the moves by Royal Bank of Scotland, Barclays and Bradford & Bingley to tap shareholders for funds.

Certainly, by conventional measures, bank shares do look exceptionally cheap. Take Barclays. The consensus among investment analysts is that the bank will make earnings per share of about 57p next year. Yet the price of Barclays shares is 320p. On paper, the shares look a bargain. However, they are not cheap enough to have persuaded the vast majority of Barclays shareholders to back the bank’s £4.5 billion fund-raising exercise - which has increased the number of shares in issue by almost a quarter. As a result, most of the new shares have ended up in the hands of a group of investors led by the Qatar Investment Authority and the Singaporean group Temasek, which only last year was among a group that bought a Barclays stake at 720p a share.

Look, too, at HBOS. When chief executive Andy Hornby announced a £4 billion rights issue in April, it seemed certain that the fund-raising would go without a hitch: the bank’s share price was then nudging 500p, and the new shares were priced at 275p. Yet at the beginning of last week, HBOS shares were changing hands for as little as 254p. They recovered by Friday, but some 90% of the issue will be left in the hands of investment banks that underwrote the issue.

With HBOS now worth only £10.5 billion (not counting the rights-issue proceeds), roughly 60% of its likely book value at the end of this year, the shares are valued at less than seven times forecast earnings for 2009 - if the stock-market consensus is correct. And that, of course, is the big if. Time after time, analysts have been caught out as banks have admitted that they are having to take big write-downs on the value of their assets.

Banking analyst Sandy Chen of Panmure Gordon, who has been consistently bearish on bank shares, maintains that the market is still taking too optimistic a view of likely write-downs and the need for future bad-debt provisions.

“For retail depositors, there should be very few concerns. And for debt-holders, the government has sent pretty clear signals that they won’t lose out. But I think holders of equity in the banks still face a significant risk of seeing further write-downs and bad-debt charges.”

Chen forecasts that Barclays will make earnings of less than half the City’s consensus figure of 57p a share in 2009. For HBOS, he forecasts 24p a share against a consensus figure of 56p. His forecasts are far lower than the consensus because he believes banks have underestimated their exposure to toxic debts, and he is pessimistic about the damage that a recession could cause in the areas of personal and corporate debt.

Chen thinks the capital-raisings of the past few weeks are not the last. Barclays may need more money, he believes.

Analysts at Citi estimate that Barclays will have to raise a further £9 billion on top of the £4.5 billion clinched last week. Chen reckons that even at their lowly price of 320p, Barclays shares are likely fall to 230p. AT the macro-economic level, there are good reasons to feel anxious. Chris Watling of Longview Economics claims that over the past decade, for every £1 increase in British GDP, aggregate debts have risen by more than £4. “That increase in indebtedness has been driven by the banks,” he said. “And it’s unsustainable.”

British companies - excluding those in the financial sector - have vastly increased their indebtedness over the past 20 years. Watling estimates their debt now stands at 110% of GDP compared with less than 40% of GDP two decades ago. It looks set to unwind, he said.

Company liquidations are nowhere near the levels in the recession of the early 1990s, when they peaked in 1992 at about 6,000 a quarter. Even so, in the past 12 months there has been a steady increase in the number of companies folding.

Then there is the home-loan market. Analysts at Citi reckon that by the early part of this year, mortgage repayments as a share of pretax income had risen to 25%. Five years ago they were at 15%. Put simply, it is going to be harder for people with large mortgages to maintain their repayments.

Is the overwhelming gloom about the banks justified? Have managements been negligent or downright duplicitous in hiding their liabilities?

“Some of them have been both,” said Buxton. “There were some managements who just didn’t know or understand what parts of their organisations were getting into.”

Last week’s announcement of the Alliance & Leicester takeover by Banco Santander - which already owns Abbey - gave investors some reassurance. Buxton said: “The Santander bid for A&L shows that someone could come along and pay book value. They [Santander] will make an enormous amount of money from that deal. At least it sets down a marker, showing that book value can stand for something.” WITH bank shares having been hammered so hard, one or two brave souls are calling the bottom. This weekend Morgan Stanley advised investors to increase their holdings in Royal Bank of Scotland (RBS). The shares have halved since April and are down by more than three-quarters from last year’s peak. Last week they were at their lowest for a decade.

Morgan Stanley analysts say the share price now looks too low. Their figures price RBS shares at 4.4 times expected 2009 earnings. That price more than reflects the risk of further write-downs on structured credit instruments and the possibility of a 1990s-style recession. RBS has already announced £2.7 billion of write-downs.

Others are sceptical. A fund manager said: “The worst of the news may be out, but that doesn’t mean there won’t be any more bad news.”

The next uncertainty is how much havoc a recession might wreak as homeowners default on mortgages and companies struggle to repay loans. Arturo de Frias, banking analyst at Dresdner Kleinwort, said: “Borrowers can take months to default. Before we see real big chunky defaults, we may have to wait 12 to 24 months.”

It could be a long while before shareholders have much to celebrate.

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