Rating the Top 12 U.S. Banks - From Hidden Gems to Zombies 77 comments
Martin Hutchinson
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U.S. Treasury Secretary Timothy Geithner last week proposed a series of programs, totaling $1.5 trillion, to bail out the U.S. banking system. Of course, Geithner hasn’t told us precisely how he plans to spend the money, or identified which banks require such an enormous outlay.
So I thought it was worth looking at the United States’ 12 largest banks to see where the problems might be and identify which banks might need big infusions of government cash. I perused the financial statements of all 12 banks, and also looked at their market valuations.
Unlike when the Troubled Assets Relief Program (TARP) was proposed in September - when the projections for potential losses were largely financial conjecture - we now have important concrete data on the banking system’s troubles; namely, each of the banks' annual financial reports for 2008.
Those figures were calculated with the most current knowledge of the economy’s housing crisis and other related financial disasters, and with the potential for losses on "bad assets" fully taken into account and examined in detail by auditors. Further economic bad news might weaken new batches of assets, but at least the biggest problems should by now be fully apparent.
There is a lot of information - both about potential bailout needs and possible investment bargains - which we can gain from the banks’ annual earnings figures. For instance:
- Banks that made profits in the very difficult fourth quarter of 2008 are probably in good shape, especially if their loan-loss provisions exceeded their charge-offs (the amount actually lost).
- Even banks that lost money in the fourth quarter - an exceptionally harsh three months - have no immediate need for funding, provided they made money the rest of 2008 and seem likely to resume making money going forward.
- In this context, management’s dividend policy is a good indicator: If the dividend is maintained, rather than being sharply cut or suspended, management is probably genuinely confident about the bank’s position and outlook.
- Another good indicator of a bank’s health - at least of the market’s perception - is the ratio of share price to book value. If that’s below 25% or so the market lacks confidence in the bank’s ability to solve its problems.
Using these indicators, we can assess the viability of the leading U.S. banks. Each bank can then be classified with one of our four "official" Money Morning designations. These designations, or labels, consist of:
- Zombies: Institutions kept alive only by TARP funding. These subtract value from the economy and should be put out of their misery through controlled liquidation, with the healthy parts being salvaged.
- Walking Wounded: These banks may need a little bit more help, but are currently operating adequately on their own. One caveat: An intensification of economic downturn could push some of them into "zombie" status - or even bankruptcy.
- Risky but Proud: These banks have relatively high risks, because of acquisitions or their business models, but are operating at full blast and can hold their heads high for their success in dealing with 2008’s enormous difficulties.
- Hidden gems: These banks have conquered 2008’s difficulties, taken care of their bad debt problems, and still managed to make a substantial profit. Short of a repeat of what U.S. banks had to deal with from 1929-1933 as part of the Great Depression, these financial institutions should continue to operate in the black.
The Envelopes Please …
We listed the 12 largest U.S. banks by assets, as of Dec. 31, ignoring foreign-owned banks, Goldman Sachs Group Inc. (GS), and Morgan Stanley (MS) (those last two are onetime investment banks that are technically now commercial banks, but still possess a very different business mix. We give you a rundown on the financial stability of each one, and give each institution with the single-most-appropriate of our four official Money Morning designations. The Top 12 banks, biggest first, are as follows:
1. Bank of America Corp. (BAC) - Zombie: BofA has about $2.8 trillion in assets including Merrill Lynch, which was acquired after the end of last year, and Countrywide Financial Corp., formerly the nation’s No. 1 housing finance bank. It received $45 billion from TARP, plus $118 billion in guarantees against Merrill Lynch’s assets. At Friday’s closing share price of $5.17, the stock was trading at 21% of book value (it closed at $4.90 yesterday). BofA posted a fourth-quarter net loss of $1.55 billion, plus a Merrill Lynch net loss of $15.3 billion, which forced BofA to cut its quarterly dividend to a nominal one cent per share. Judging by other banks’ results, if Bank of America had made no acquisitions in 2008, it would be in solid shape. With the acquisitions, however, it’s a basket case - and may well need even more federal funding.
2. JPMorgan Chase & Co. (JPM) - Risky but Proud: JPMorgan has $2.175 trillion in assets, and received a $25 billion TARP investment. It’s a major international bank with a large investment banking operation. It bought The Bear Stearns Cos. Inc., investment bank in March and the Washington Mutual Inc. thrift in September, both with Federal government help.
JPMorgan booked $702 million in net income in the fourth quarter and $5.6 billion in net income for all of 2008. The company also had a fourth quarter loan-loss provision of $8.5 billion and charge-offs of $4.5 billion. But there were also $2.9 billion worth of securities markdowns in the investment banking operation. Again, this bank is high-risk from an investment standpoint because of its acquisitions, but it appears to be in excellent shape with no immediate need for extra funding. Its Friday closing share price of $24.69 equates to 72% of net asset value, though it closed yesterday at $21.65, down 12.3%. It pays a quarterly dividend of 38 cents per share.
3. Citigroup Inc. (C) - Zombie: Citi remains the nation's third-largest bank, with $1.9 trillion in assets. It received a $45 billion TARP investment, plus guarantees on $301 billion of assets. At Friday’s close of $3.49, it was trading at 25% of book value. Citi lost $8.3 billion in the fourth quarter of 2008 and $18.7 billion for the whole year. It was finally forced to sell control over its Smith Barney brokerage operation to Morgan Stanley in January, and has reduced its dividend to a nominal penny a share. Citi has been a serial flirter with bankruptcy over the past 30 years and remains a basket case. There are a few good assets buried within the rubble - chiefly because the company is so large and diverse.
4. Wells Fargo & Co. (WFC) - Risky but Proud: Wells Fargo has $1.3 trillion in assets, and garnered a $25 billion TARP investment. Originally a small bank based in San Francisco, Wells Fargo officially entered the heavyweight class with its acquisition of Wachovia Corp., late last year. Its Friday closing price of $15.76 equated to 104% of its book value, though it closed yesterday at $13.69. Wells Fargo’s stock pays a quarterly dividend of 34 cents. The company posted a fourth-quarter net loss of $2.55 billion, not including an $11 billion net loss at Wachovia. Wells Fargo’s full-year earnings totaled $2.84 billion. It had a fourth-quarter loan-loss provision of $8.4 billion, compared with actual charge-offs of $2.8 billion. Wachovia’s 2006 acquisition of the California mortgage bank Golden West Financial puts Wells Fargo at risk, but the company’s operations appear solid and it has no immediate need for extra funding.
5. PNC Financial Services (PNC) - Risky but Proud: The Pittsburgh-based PNC has $291 billion in assets, after buying the slightly larger National City Corp in October. It also received a $7.6 billion TARP investment. At Friday’s closing price of $28.20, PNC’s shares were trading at 79% of book value. The company pays a quarterly dividend of 66 cents per common share, and posted a fourth-quarter net loss of $248 million (excluding costs associated with its acquisition of National City, the company had a fourth-quarter profit of $132 million). PNC had provision for credit losses of $990 million, compared with net charge-offs of $207 million. This is one of the riskier banks because of the difficulties in integrating National City and possible problems in National City’s loan portfolio. But it appears to have no immediate need for funding and is currently profitable, and its stock is selling close to book value and paying a solid dividend. One final point: PNC’s shares fell only 6.1% yesterday, a day when the shares of most major banks fell by more than twice that amount, perhaps hinting that investors perceive less risk in PNC’s shares.
6. U.S. Bancorp (USB) - Hidden Gem: U.S. Bancorp has $266 billion in assets, and received $6.6 billion in TARP funding. This regional banking firm is based in Minneapolis, and the company operates primarily in the upper Midwest and Northwest. With a closing price of $12.40 on Friday, USB shares were trading at 131% of book value (the shares closed yesterday at $10.73, down 13.47%). The company also pays a quarterly dividend of 42.5 cents per common share. U.S. Bancorp posted a fourth-quarter profit of $260 million, and a profit of $2.94 billion for all of 2008. It also had a credit-loss provision $1.3 billion in the fourth quarter, compared with actual charge-offs of $627 million. U.S. Bancorp is in good shape, with no apparent need for extra money.
7. The Bank of New York Mellon Corp. (BK) - Hidden Gem: New York Mellon has $237 billion in assets, mostly through its operations in New York and Pennsylvania. It received $3 billion in TARP funding. With closing price Friday at $25.26, Bank of New York Mellon was trading at 125% of its book value (the shares closed yesterday at $23.13, down 8.4%). The bank posted a fourth-quarter profit of $28 million, and net income of $1.39 billion for all of 2008. The fourth quarter was tough as for everybody, but Bank of New York Mellon appears to have no near-term need for funding.
8. SunTrust Banks Inc. (STI) - Walking Wounded: Sun Trust has $189 billion in assets, and received $4.9 billion in TARP financing. Based in Atlanta, the bank has operations in the Mid-Atlantic and the Southeast. Its Friday closing price of $8.72 meant that SunTrust shares were trading at only 19% of their book value. The company posted a fourth-quarter loss of $379 million, but a profit of $747 million for all of 2008. It also had loan-loss provisions $962 million in the fourth quarter, compared with $552 million in charge-offs. SunTrust has reduced its quarterly dividend sharply to 10 cents per share, but it appears to be in no immediate trouble. However, if the economy deteriorates, the bank’s exposure to the Florida housing market could be an Achilles' heel. Investors are clearly concerned: SunTrust shares took an 18% beating yesterday, and are down 88% in the past year, The Atlanta Journal-Constitution reported yesterday.
9. State Street Corp. (STT) - Hidden Gem: State Street had $174 billion in assets, and received $2 billion in TARP funding. It’s a Boston-based bank, but serves institutional investors throughout the world. At Friday’s closing price of $27, the shares were trading at 111% of their book value. State Street posted fourth-quarter earnings of $65 million, and 2008 earnings per share of $3.89, up 13% from the year before. With a global business, conservative leverage and Boston management, State Street could gather strength when the financial crisis finally ends.
10. Capital One Financial Corp. (COF) - Walking Wounded: Capital One has $161 billion in assets, and received a $3.6 billion TARP investment. It’s primarily a credit card company, headquartered in McLean VA. At Friday’s close of $12.11, it is trading at just 20% of book value. Capital One lost $1.4 billion in the fourth quarter of 2008, and was just below break-even for the full year, but made $895 million from continuing operations. Its stock pays a quarterly dividend of 37.5 cents per share. Capital One is in dangerous waters and could soon succumb to zombification if credit-card problems really escalate.
11. BB&T Corp. (BBT) - Hidden Gem: BB&T has $152 billion in assets, and accepted a $3.1 billion TARP investment. It’s a regional bank, headquartered in Winston-Salem NC, with its primary operations in the Mid-Atlantic region. At Friday’s closing price of $15.33 a share, the stock was trading at about 58% of its book value. The company posted net earnings of $284 million in the fourth quarter, after loan write-offs of $528 million. It posted a profit of $1.5 billion for all of 2008, and pays a quarterly dividend of 47 cents a share. I’m sure it would gladly take more taxpayer money, but it certainly doesn’t appear to need it.
12. Regions Financial Corp. (RF) - Walking Wounded: Regions has $146 billion in assets, and received $3.5 billion in TARP financing. It’s a regional bank, headquartered in Birmingham, AL, with operations primarily in the Southeast. At Friday’s closing price of $3.38 a share, Regions’ stock was trading at about 18% of book value, and the bank has suspended its dividend. The company lost $5.6 billion in 2008, and its tangible net worth is only $10.5 billion. However, on an operating basis, it made a profit of about $300 million. Regions had a fourth-quarter loan-loss provision of $1.15 billion, and charge-offs of $796 million. I’m classifying it as "walking wounded," but think it’s more likely to revive itself than to accept a toe-tag. In fact, it’s likely to need only a modest amount of additional funding to see its health improve.
And the Winners Are …
After examining the finances of these 12 major banks, I discovered that some additional analysis was needed - some in the investment arena, and the rest in the area of public policy. Once that was completed, I was able to reach some concrete conclusions about the new banking bill.
On the public policy side, it’s very difficult to justify $1.5 trillion of public money being used to buy assets from these guys. Of 12 banks I examined:
- Seven appear to be in solid shape, and are actually paying substantial dividends.
- Three appear weak, with possible needs for some additional help.
- And only two are actual basket cases.
Apart from the two dogs, all these banks have shown themselves perfectly capable of handling the difficult parts of their asset portfolios. That means that setting up a separate state bureaucracy to manage them, instead, is just asking for a high-cost taxpayer rip-off.
Unless it’s proposed to devote $1.5 trillion of taxpayer money to the apparently hopeless task of sorting out Bank of America and Citigroup, the true need is much smaller, with the remaining $315 billion from the original TARP program probably being more than ample for the other U.S. banks.
The most likely near-term need would appear to be capital injections into one or two of the weaker members of this Group of 12. As for the true bow-wows, the best solution from a public-policy and taxpayer-protection viewpoint would be to allow Bank of America and Citigroup to slide into Chapter 11 re-organization, with the ultimate objective being a breakup and sell-off of the worthwhile pieces, while holding back the relatively modest amounts of government financing or Federal Reserve money that might be needed to staunch any blood-letting that their bankruptcy caused.
As investments, the "Hidden Gems" for the most part represent very interesting potential bargains.
USB looks solid and profitable, with a dividend yield of an extraordinary 15.84% as of yesterday’s close.
BNY Mellon does not appear particularly risky, but yields only 4%; I actually prefer the "Risky-but-Proud" PNC, which has considerable upside if it can manage to digest its National City acquisition, avoid big credit losses and achieve cost savings.
State Street has a dividend yield of only 4.14%, but looks rock solid and its shares are trading at only about 5.9 times earnings.
BBT also looks solid, and has a massive dividend yield of 13.18%.
If you think the U.S. economy is descending into a bottomless pit, hold off. But if you’re reasonably optimistic long-term, these banks are well worth considering for income-oriented investors.
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This article has 77 comments:
Excellent job. This was the must lucid, suscinct analysis of the major banks I have seen yet. I could only hope the Treasury Secretary could be as clear when dispensing Tarp money.
Any comment on Barclays?
I bet he is selling these banks short after forcing them to assume the bad assets of failing banks.
See OCC report at: www.occ.gov/ftp/releas...
right?
Wrong. It means that the bank is withdrawing desperately needed cash from itself as a roundabout way of compensating the stockholding executives, all of whom see the writing on the wall. And they're borrowing money to do this - at junk bond like interest rates.
Over 20% of USB insider shares have been sold in the last 6 mos. as yield-chasers have until recently kept the stock price propped up. finance.yahoo.com/q/it...
Folks, if you owned a company outright, would your net worth increase if you made your company borrow at 8% to pay a dividend, and then put your dividend in a bank account earning 3% (at the same level of risk/certainty as the interest on your debt)?
No. Paying 8% to earn 3% is a negative carry trade. As an added bonus, you would get to pay a 15% dividend tax for this value-destroying trade!
Even if the company has 0 debt, you're just trading $1 of equity for $1 is cash (and paying taxes, so make that 0.85). In theory, you're invested in the stock because you think the company will have a higher ROE than you could get with cash. What's the point of reversing that trade through dividends, but not selling the stock?
Yet to some stock buyers, this somehow seems like a good deal. Stocks are not bonds. If you want yield, buy bonds. If you want to buy stocks, consider the whole business model. In my opinion, bank dividends are a negative in this environment.
Thanks
seekingalpha.com/artic...
I'd like to add my voice to the gentleman who asked about BCS. Any thoughts there?
Any thoughts about M&I?
Thanks again.
Guess the only area I would challenge is the "hidden gems" and the investment perspective --- it's not that I necessarily disagree with the analysis of the banks; it's that most of the "hidden gem" banks haven't been greatly discounted by the market so they don't necessarily look appealing to me as investments. I'm of the opinion that banks (even the good ones) are going to continue to suffer for another year or so at least as delinquinces increase.
I think there are definitely better sectors to invest in -- unless you can find the bargains. So the best investments here are the ones that have been substantially discounted by the market, but that should survive relatively in tact. To me, that makes STI and RF the best candidates; even if they have considerable risk. BBT is also looking increasingly appealing and probably relative safe compared to many others. WFC might also be a good investment candidate, but admittedly, I'd fear taking on a company with so much junk floating around on their books --- even if they appear to be in relatively good shape overall. Unless WFC gets discounted a bit more substantially, I'll just stay neutral on them.
STT, BK, and USB have less junk on their books and look poised to survive, the market in general doesn't really seem to disagreement with that assessment --- hence, I see little value there. You could probably make equal or greater returns investing in an index fund over the next few years and you'll have less worries.
Lets see how this can pan out: I expect the next bear market bounce to start late March or early April 2009 and will last thru Sept 2009 with Dow Jones being able to regain the 9,000 to 10,000 range before the final capitulation sell-off begins. Capitulation sell-off is unpredictable and may extend up to April 2010 with Dow Jones reaching 700 to 1,000 range in the worst case scenario. Conservative estimate is 6,000 to 6,500 target range by Nov/Dec 2009. We are dealing with an Expanding Flat pattern on the 100 year chart of Dow Jones. It is expanding, so the C wave is a lot more volatile than the A wave, the upside is that the C wave is a lot more predictable pattern than the A wave only that the extent of the final run down is extremely hard to know until a viable reversal bounce starts registering on the weekly chart. 2001 to 2003 tech meltdown is the A wave of an A-B-C pattern. The bear market rally from 2003 to 2007 is the B wave. We are now witnessing the predictable but panic driven volatile C wave.
Citigroup = if it can survive the next run down in March 2009, it could go up to $10 by Sept 2009 for a meager retrace of 38.2% of its last sell-off from Sept 2008 or less than 15% retrace of the total sell-off from Dec2006. Trading strategy is to buy the next dip to possibly $2.10 if very lucky otherwise start buying at these levels and sell half at $5 conservatively and $8 with trepidation and $10 for the heroic. Hold the other half as investments just in case C survives the final capitulation sell-off of Sept to Dec 2009 and be able to regain it former $60 price in 5 to 15 years. No loss of capital unless it goes BK or nationalized before April 2009.
BAC = i dont know if the last low of $3.77 will still be broken. For now it is trying to form an inverted Head and Shoulders pattern on the daily chart with potential target of $10.89 initial run if the iHnS becomes successfull. On the weekly chart, potential resistances are at $13.50 to $17.40 assuming $3.77 holds and the iHnS succeeds. Strategy is to buy at today's low or tomorrows' early dip. Sell half in Sept2009 and hold half as investment same as C.
JPM = untradable; no definitive pattern to hold on to. It may or may not go below $15.26 low of year 2002. But for long-term investment purposes; buying at these levels can be considered prudent. there is also a buying support at $19.69 and a buy potential in the $16.80 range just in case the Jan2009 low got broken and the 3 push down bottoming pattern finally emerged - baring extremely bad news for JPM which is not expected within the next 2 months. Investors prefer higher low bottoming process rather than the 3 pushes down pattern. If JPM can significantly rally during the Dow Jones Apr-Sept2009 bear market rally; then it may be able to survive with a higher low by Nov/Dec2009. For 20 to 30 years hold; double the last high of $73.80 and add it to the last low of Nov/Dec2009, not the last low of year 2002 as a quick and dirty estimate price. For 5 to 15 years hold starting 2010; add $73.80 to the last low of Nov/Dec2009 as a QnD target.
WFC = another incomprehensive chart pattern. With no basis to find out possible downside price target except fibonachi price extension ratios; I would rather buy this at $11.20 and $8.49 with $5.49 as the extreme low price. Same technique as JPM for finding future price runs the QnD way.
STT = Same pattern as Dow Jones on the monthly chart which is an Expanding Flat. I already bought some at $15.10; will buy some more at $21.33 to $18.22 levels for long-term hold. Price target is still $12.27 nominal but STT most likely will not be able to realize it's nominal target if it goes way above the overhead resistance of $30.37 during the next bear market rally to Sept2009.
BTT = it has a price target of $17.11 but it's highly volatile monthy chart pattern prevented me from clicking my mouse at the opportune time which is a blessing. Now waiting for $10.68 as the next opportunity or if the daily will give me a recognizable pattern within Feb/Mar2009. Maybe a hidden jem but also maybe holding hidden trash that is being reflected on the extremely volatile monthly chart. Better to deal with the devil you know than the ones you don't if you are a pure lazy investor type.
USB = still untouchable at this stage; more chart data is needed for at least 10 months before it can develop something tradable. Pure darting skills needed at this moment.
COF = i dont follow this so have no opinion. Best to buy Nov/Dec2009. The monthly chart is still forecasting lower lows. $7.44 perhaps as a nominal target. Still questionable run down; at least citigroup is already in extended run down which makes it's viability a major question after the lower price support at $12.75 had been exceeded. $2 and change are option prices for C; you don't mind buying a put option protection and losing the insurance fee, do you? Same goes with BAC.
Those are the ones I prefer to track around daily.
On JPM you fail to mention that they are the biggest CDS broker in the market. Counterparty risk anyone? They are a zombie in their own right. They know if a crisis happens the only thing that can save them is government intervention. That is why the Fed gave them Bear Sterns to begin with, it is better to have all the counterparty risk in one spot so it is identifiable and manageable, rather than spread across market players.
Overall, good summary.
(a) everyone buys the stock because "warren" owns it. hello, anyone try to ride his coattails on ge? welcome to the down 50%+ club. needless to say (but I’m going to anyway), owning a stock because someone else does is not sufficient.
(b) ca/fl exposure. it’s clear that wfc has as much (or more) exposure to the two worst housing markets in this country as any other bank out there. tell me how a state with unemployment headed to the mid-teens can support the overbuilding that occurred over the past 5 years? did anyone else watch "house of cards" on cnbc? just about everyone profiled lived in california.
(c) pick-a-pay mortgages. I wasn't aware that there were "good" pick-a-pay loans. apparently, wfc management believes they have $57 billion worth. nonetheless, they stated in their earnings "call" (it was pre-recorded, no question please and thanks) that the ltv on these loans were 133% based on current estimates - yet they are held on the books for 85% of face. anyone else see a disconnect?
(d) tangible common ratio. funny how they don't report this number. by all estimates, wfc clocks in at roughly 2.43%. when you take into account that the bank needs to write down the value of some of the "assets" on its books (which would directly hit the equity account), there is little - if any - margin for error.
(e) valuation. wfc has a current market cap of ~$52 bn, it’s not clear to me that they should be valued more than bac and c combined (which is $40 bn). for that matter, I would say that goldman and morgan stanley have better chances at turning a profit than wells, yet both have market caps well below our friends on the left coast.
perhaps if they had left wachovia in the clutches of citi, the story would be different. just because there is a different name on the door doesn't mean all those golden west assets will magically turn into gold (why do you think wb ran into trouble?). my bet, wells is about the catch the wave...make that, get hit by the rushing tide that is the tsunami of our financial system...
Several other major positives should be considered in any analysis of WFC: First and most important, WFC has an immense and low cost liability/deposit base) which allows it to fund its assets at large-bank industry-leading net interest margins. During 2008, as Indymac, Wamu and later, Bank Of America were percieved as risky deposit locations, WFC grew its deposits an astonishing 31% as customers fled those banks to move in WFC's direction. The result is that cash earnings from future net interest margins will either amp earnings markedly or cushion presently unseen asset deterioration.
Second, WFC has a history of tight underwriting of assets. When looking at WFC vis-a-vis the rest of the industry, this has to be considered. The evidence can be easily determined with an examination of past credit loss data product-by-product, and current delinquency and default rates. Put that together with loan loss provisions and you get a positive feeling about potential future asset deterioration.
Third, WFC has virtually no capital markets/investment banking business by design---its book is plain vanilla when compared with the the other banks in the top 5.
Fourth, the bank has major real estate loan originating and servicing businesses which put it into an ideal position to capitalize on a potentially more positive real estate future. Its history of prudent underwriting is well known, as is its practice of selling vitually all of its mortgage loan production with no liability tail.
I am going to ask a "stupid" question. Why did this bank receive TARP money if it managed to churn out $1.39 billion in income for 2008?
when wells bought wachovia...what amount of intangibles did Wells put on its b/s to account for the acquisition? apparently w/ your logic wachovia will not add any value to wells (deposits, branches, etc. are all worthless). if TCE is so important and the only relevant metric, and the entire banking system is insolvent...how do you propose that the US gov't take on over $10tn of deposits and liabilities for half a dozen of the largest banks? right...so maybe nationalization will not happen b/c it's too costly.
but banks need to subtract out 100% of all intangibles b/c they're worthless...and that causes TCE to be too low, hence nationalization. if all of the sudden you're saying you need to take the time to account for the various business lines and the value of each and the value of each asset class on the b/s oh well that would require a DEEP dive into every bank. something no one has done to date.
if you look at assets/common equity....and assume some sort of earnings or loss for the next 2 years...using the worst estimates on the Street (most conservative) there isn't one bank that goes below 3% common equity/assets. is 3% common equity/assets important? probably not...but that's the general "stress" test everyone seems to be working off of and claiming the system is insolvent.
as for a solution, I wish I had an answer for you. unfortunately, the approach the gov't is taking is ad hoc and not well thought out. how else do you explain the market's precipitous decline ever since tarp 1 and tarp 2 were announced? perhaps they should take a page from mbia’s playbook.
while i agree that all mgmt teams were slow to confess their sins here's an interesting thought. if you were c and bac and had the gov't willing to lend you an absurd amt of money (recently, not first round of tarp) and could kitchen sink loss estimates in private negotiations w/ the gov't for funding, would you choose to do so or ask for the bare minimum? c and bac are the only two banks w/ significant loss sharing agreements w/ the gov't. how they got that kind of deal is beyond me but they're imo not the ones everyone should be so worried about. it's the regionals that are more likely to go down and not have any gov't support. there needs to be someone to aggregate all the assets of the smaller banks that will go out of business. it's easier for a national bank to do that then to coordinate the sale of a hundred pieces of bac and c to various smaller players.
On Feb 19 05:53 PM investorcluzo wrote:
> 360350 - wfc added $9 billion of gw between sept and dec (I presume
> acquisition related). as I said before, tce is NOT the only metric.
> please explain to me how $57 billion of pick-a-pay mortgages - widely
> regarded as the worse than subprime - can be quote unquote "good"?
> think about it, if your house had a ltv of 133% and you couldn't
> afford the payments: would you (a) turn in the keys or (b) keep servicing
> the loan even if it meant you couldn't eat for 3 days a week? now,
> how does management look anyone straight in the eye and tell them
> that, despite the loans having a ltv of 133%, they carry said "assets"
> on their books for 85% of face (which is exactly what they did on
> the earnings call)?
>
> as for a solution, I wish I had an answer for you. unfortunately,
> the approach the gov't is taking is ad hoc and not well thought out.
> how else do you explain the market's precipitous decline ever since
> tarp 1 and tarp 2 were announced? perhaps they should take a page
> from mbia’s playbook.
“The portion of the Pick-a-Pay portfolio that we did not mark, $57.7 billion, has dramatically better credit performance and characteristics. For example, the 30+ day delinquency ratio was only 10 basis points. Additionally, these borrowers have credit statistics that are more representative of Wachovia’s remaining consumer real estate portfolio with an average current FICO of 712 and an average current LTV of 80 percent at quarter end.” (see page 12)
https://wellsfargo.com/pdf/pre...
it's been widely reported that housing prices have fallen, you pick the number - is it 15%, 20% - since the end of the year. even if the average ltv was 80% at 12/31, that is clearly not the case now. not to mention, those numbers are based on stale data.
I'm not sure why wfc wouldn't take the gov't money (or for that matter cut the dividend). maybe management is wearing rose colored glasses or perhaps it was a poor attempt to show strength when everyone around them was falling apart. this is no time to be a hero. the tax break they got isn’t going to be enough to save them. hopefully, they will set up a national “bad bank” – we could then get some price discovery and assets may begin to trade again. at that time, wells could “really” clean up their books and right the ship. until then, their balance sheet will be as murky as the others…
> would be different. just because there is a different name on the
> door doesn't mean all those golden west assets will magically turn
> into gold (why do you think wb ran into trouble?).
Perhaps I'm just a dumb country boy... but Wells paid only about 15B for Wachovia, right? Even if they take a 50% loss on all of WB's loans.. why is this such a terrible situation for Wells?
Please, a reality check is in order for those who want to be bullish about banks. There is way too much banking capacity in the US. Our government is hell-bent to keep big bad ones afloat. The "good" banks will accordingly not get the profit they deserve, any more than the "good" homeowner, who paid bills on time, will profit from the Pelosi-Obama agenda.
It reminds me of the airline industry, which used federal bankruptcy laws to maintain constant pressure on margins of responsible carriers, with the result that none of them are good investments.
People forget that a bank was traditionaly a simple thing. It takes in deposits (liabilities) and makes loans (assets). Assuming that the loans are good, a bank is worth a little more than book. It's only when you add a little imagination, nonbanking products, and greed that you value a bank for more than that.
I would be sanguine about USB and other "good banks" in this article if I thought their less successful competitors were going out of business. However, they will be propped up by government, so they will continue to pressure margins of "good" banks.
Banks get money for almost nothing, and can lend it out at great margins. However, there just aren't enough good customers, and there are too many banks chasing them. Avoid the sector unless you are a short term trader angling for a bounce.
LordD
On Feb 19 08:02 AM ozcutty wrote:
> i can't make sense of banks right now so don't feel confident with
> any of them. There are plenty of other quality companies to choose
> from, why even bother? for instance i just doubled my holding of
> AB, plenty of upside without all the uncertainly of huge debts.
I think we have a lot of investment bankers playing CYA right now and they're trying everything in their power to pick up pennies to cover huge losses. Maybe it's time to split up Citi and BOA into profitable bite size pieces.
On Feb 19 09:31 PM Philip Gvinter wrote:
> Wells paid $15B and agreed to absorb losses. This is a bad deal for
> Wells if the losses taken are significantly greater than the future
> revenue that the purchase will generate. For example if they have
> to take an additional $35B of losses the total purchase price would
> be $50B. This would mean that they must somehow turn what they bought
> into more than $50B. This can come from future earnings or the sale
> of the assets they got as part of the deal. I do not see how Wachovia's
> operations can be expected to earn anything near what they used to
> given the demise of the free for all mentality in the securitization
> markets which drove a large percentage of those earnings. My estimates
> are that Wachovia's operations are capable of producing the kind
> of earnings that a bank of similar size was able to produce around
> 2001 or 2002. That would be about a 50% haircut from the peak achieved
> in 2005 and 2006. At that rate it would take WFC over 25 years to
> recoup their investment. To me that represents too low of a yield
> on the investment.
please step away from the kool aid machine. wachovia is going to be the gift that keeps giving...like herpes. my bet is that you will see charges for the next few quarters as management writes down the purchase. wfc's tangible book value is ~$11 per share, most banks are trading at less than 1/2 their tbvs. look for your stock to trade toward $5.50 or below.
Malfactorius - "Perhaps I'm just a dumb country boy... but Wells paid only about 15B for Wachovia, right? Even if they take a 50% loss on all of WB's loans.. why is this such a terrible situation for Wells?"
please check your numbers. wells took on $498 billion, with a "B", in loans from wachovia. of that, they only marked the face value of the loans down by $74 billion. see page 11 of the presentation.
https://wellsfargo.com/downloa...
if wfc, as you suggested, marked the loans down by 50%, it would wipe out all the common and preferred at the company and still leave a hole of $100 billion – but hey, they only paid $15 billion for it (right?)...but I didn't call you a dumb country boy.
it's total exposure seems to be some $87.6 Trillion.
Granted, not all the value falls to zero but isn't this a really worrying level of exposure to derivative risk?
Bad Assets Relief Fund or B.A.R.F
A) Let Citi and BofA go under, taking down with them all that infrastructure, and fire all the wonderful folks that work there.
B) Have Uncle Sam buy their "toxic assets" with TARP mooola, and save their bottom line.
C) If these guys want and need Uncle Sam's money, then recapitalize them, and get preferred shares that pay dividends, and put that in Uncle Sam's back pocket.
Idea C) is my choice. Buy the banks, not the toxic assets. Because of the way banks will work the system, buying toxic assets will just create more toxic assets. I think this is a once in a lifetime opportunity for Uncle Sam, and he should take it! Here is why:
video.google.com/video...
Therefore, since this idiot doesn't understand that then everything else he has to say is without credibility.
Two observations.
1) The issue of who survives is 100% political. The government doesn't want to nationalize Citi because is it is Citi and for no other reason.
2) Your otherwise great analysis ignores off-balance sheet items. In the case of Citigroup about $1trillion.
On Feb 20 12:01 PM 360877 wrote:
> You forget that Wells Fargo also got a $11B tax write off. The effect
> on their balance sheet was zero. Wells Fargo will continue to post
> a profit through 2009. Kovasavich and Stumpf run a tight ship and
> are very conservative in their approach. This message runs strong
> throughout the company.
>
>
> On Feb 19 09:31 PM Philip Gvinter wrote:
It's a great national and international bank.
BAC's world-wide services are unmatched.
It's well known overseas.
On Feb 18 04:36 PM coloneldebugger wrote:
> I guess this explains why AmEx cut my limit because I have a mortgage
> with SunTrust.
>
> right?
In my noobies opinion, Citi and BAC will survive and that is solely because government has injected such a huge sum of tax payer money...
How on earth, the government want to inject that much money if they don't see any future on what they have invested in...they can just let if failed like lehman..(which I am also taking a loss because I own that stock).
I believed that the reason for the such a big drop in the market is how a so called " big force" with lots of money try to get a bargain, the way they doing it is by giving out lots and lots of negative rumours, so they can shop for cheap price...
I once remembered that buffet said that market will always come to you everyday and give you opportuinity to buy.. the problem is do you notice the opportunity...do you have the guts to take the opportunity...??
I lived in Jakarta (indonesia).... so i am going to give some stock traded in Jakarta Stock exchange as for example:
1 usd = rp 12,300.
and at the moment a company called : Astra International Tbk (ASII.JK) priced at Rp 10900 (friday closing) about usd 0.886
and the price of let say AIG is USD 0.5
Do you guys think that astra international will be bigger then AIG? I don't think so...
BAC - Huge significant buys over the last month Feb and Jan.
RF - Large significant buys over the last month of FEb.
USB - Large significant buys over the last month Feb
STI - Large significant buys over the last month Feb.
WFC - Large significant buys over the last month Jan
C - Large significant buys last Dec 2008
JPM - Two buys this Feb
GS - Significant buys Dec and Jan.
On the other hand there were very few sells in any of these. Pessimists love to say the banks need to come clean because we don't know what's on the books. The point is that WE DON'T KNOW. Is it possible the bankers are telling us that this latest sell-off is over done? I realize that insider buys can be a bad signal, in this case I don't thinks and wouldn't be a seller of banks at these prices.
This bank is a winner going forward
biz.yahoo.com/t/09/380...
he exercised options worth $1.5 million less than 2 weeks later. if you're the ceo, it's your job to put a happy face on the situation - what better way than to say: "hey guys, look at me buying shares, we'll be fine". while I would agree insider activity is a good indicator, the sells are much more telling than the buys.
On Feb 22 06:43 PM Jolly_Rancher wrote:
> Take a look at insider buying in some of these shares.
>
> BAC - Huge significant buys over the last month Feb and Jan.
> RF - Large significant buys over the last month of FEb.
> USB - Large significant buys over the last month Feb
> STI - Large significant buys over the last month Feb.
> WFC - Large significant buys over the last month Jan
> C - Large significant buys last Dec 2008
> JPM - Two buys this Feb
> GS - Significant buys Dec and Jan.
>
> On the other hand there were very few sells in any of these. Pessimists
> love to say the banks need to come clean because we don't know what's
> on the books. The point is that WE DON'T KNOW. Is it possible the
> bankers are telling us that this latest sell-off is over done? I
> realize that insider buys can be a bad signal, in this case I don't
> thinks and wouldn't be a seller of banks at these prices.
On Feb 18 02:48 PM khaz wrote:
> Add NTRS to the hidden gems list.
On Feb 18 02:48 PM khaz wrote:
> Add NTRS to the hidden gems list.
If the US govt continues its gradual steps towards nationalization of banks, I wonder what this will mean for us going forward. Do we really want our govt to own our banks? I think the danger with this is that nationalizing the US banks leaves the door wide-open for future discussions of a global bank, operated by a central authority with representatives from other countries.
BBT just increased its dividend. I believe it has a track record of doing so on a quarterly basis for the last 35 years with a resultant compound dividend growth of > 10%.