A Look at Banks' Tangible Book / Asset Ratio

We recently read some very interesting research courtesy of Pali Capital that examined the tangible book/asset ratio of various financial institutions. They looked at this ratio of institutions all over the world, and we wanted to highlight some of the major ones we saw. For instance, we see that Washington Mutual, which already essentially 'went under' by nature of forced acquisition, has a tangible book/asset ratio of 3.66. And that number is on the higher end of the scale/list. So, the thinking would be that many of the institutions with ratios lower than that could potentially be in trouble as well. Because, after all, their ratios would be categorically 'worse' than that of an institution that's already had problems. Of course, we do realize that each institution is an individual entity and should be treated as such; it's situational. But, as we run through the list, you'll start to notice that the lower the ratio, the more troubled banks we run into. Let's have a look, noting that those listed in bold have either already failed, been forcibly acquired, or are known to have major problems.

First, the US banks & their tangible book/asset ratios:

BB&T (BBT) 6.86
PNC (PNC) 5.87
Northern Trust (NTRS) 5.51
Goldman Sachs (GS) 4.86
Morgan Stanley (MS) 4.35
JPMorgan (JPM) 3.83
Washington Mutual (WM) 3.66
---
Wells Fargo (WFC) 3.50
Merrill Lynch (MER) 2.84
Bank of America (BAC) 2.83
US Bancorp (USB) 2.74
Lehman Brothers (LEHMQ.PK) 2.39
Citigroup (C) 1.52

And now the Internationals & their tangible book/asset ratios:

Mediobanca (MDIBF.PK) 8.35
Unione di Banche Italiane [UBI:IM] 5.1
Intensa Sanpaolo [ISP:IM] 4.5
Banco Santander (STD) 3.76
---
Unicredit (UCG) 2.82
Societe Generale (SCGLY.PK) 2.68
HBOS (HBOS:LN) 2.55
Credit Agricole (CRARY.PK) 2.38
Lloyds (LYG) 2.26
BNP Paribas (BNPQY.PK) 2.12
Credit Suisse (CS) 1.94
Barclays (BCS) 1.28
ING Groep (ING) 1.18
Deutsche Bank (DB) 1.17
Northern Rock (NHRKF.PK) 1.07
UBS (UBS) 1.06
RBS (RBS) 0.95

Again, note that those listed in bold have either already failed, been forcibly acquired, or are known to have major problems. You'll also notice that the international banks seem to be in worse shape by examining this ratio alone. So, that should be interesting to watch. It's no surprise to see Citigroup at the bottom of the US list, considering how much trouble they're in and how much government assistance they've needed. And, similarly, RBS has been in a world of hurt on the international side and has the overall lowest ratio of all the institutions measured, regardless of region.

We've noted in the past that hedge fund Paulson & Co has made a fortune by betting against all things sub-prime. Additionally, they've profited from shorting UK financials and in particular, they've focused on Lloyds. Also, in our hedge fund tracking series, we recently covered Paulson's portfolio, which you can view here, along with his year-end letter & report. He's been quite successful, having made correct bets against Barclays, RBS, and Lloyds (which all conveniently fall at the lower end of the list above). We would be remiss, though, if we didn't point out the fact that John Paulson has become slightly constructive on some other destroyed assets he had been previously short, and is looking to slowly start buying them. It remains to be seen, though, if he would reverse such a bet against the institutions themselves.

Obviously, not all institutions are listed here. We noted back in January that many people thought HSBC (HBC) needed capital as well. But then again, who doesn't need capital these days? And, back in October, we had examined the leverage ratios of financial institutions. But then again, who doesn't need to delever these days?

Keep in mind this is simply one aspect of an enormously big picture in a gorge of an industry right now. You cannot even begin to unravel the woven complexities of a financial institution from a few ratios here and there. We just thought the information was interesting and highlighted that even institutions with ratios perceived to be of 'better quality than others' did not escape unscathed (i.e. WaMu). Which, by the way, is pushing the definition of 'quality' to an extreme for sure. Everyone should, of course, take all these ratios and measurements with a grain of salt. For instance, if you look at Bank of America's tangible common equity at the end of last year, you'll note that it was a positive $35 billion before acquiring Merrill Lynch, but then falls to a negative number once everything is marked at fair value and adjusted.

Jonathan Weil at Bloomberg notes that if you use these fair value numbers, Bank of America needs a ton more common equity. He also examines Wells Fargo and finds the same underlying problem. Their tangible common equity was a positive $13 billion at the end of last year. But, if you adjust everything to fair value, it also becomes negative.

This obviously highlights the recurring problems of the abyss known as a financial institution's balance sheet. So many balance sheets essentially have artificial values in place and its impossible to gauge just how well or poorly positioned they might be. We will just go out on a limb (not much of a limb, really) and assume that everyone's just simply going to need more capital. End of.

And now back to your regularly scheduled implosion.

Comments

[phelix_da_kat:]

You forgot to bold Northern Rock which is effectively state owned.. and Lloyds TSB will be 77% owned by the Govt?

Mar 10 08:49 AM

[Market Folly:]

phelix, hmm that's odd, thanks for noticing that. for some reason those weren't bolded. but yes you're correct they should be. thanks for flagging it.

Mar 10 12:08 PM

[Carneades:]

Causes of Credit Sector "Strains"
Media reports of the past several days have been replete with accounts of the "renewed concerns" within the credit markets, evidenced by widening yield spreads on even the highest rated investment grade debt. It appears that the brunt of the stress is concentrated within the financial sector, specifically in relation to the four "mega-banks". Now, given that the layer of the capital structure known as common equity does not actually even exist for these four banks, the decision regarding outright purchase of their stock is an easy one. Debt however, has until recently been a different story.

Returning to a theme commonly cited on these pages, these recent levels of credit market distress are simply a reflection of a lack of investor confidence, based mostly upon erratic Government behavior. The Purchaser of debt issued by the four major banks is basically purchasing the hope that the Government does not wipe him/her out via concoction of a haphazard rescue scheme. Ironically, in the Government's frantic effort to rescue one industry, they have further endangered another, the Insurance industry. As major players in the Credit Markets, the Insurance Companies stand to be dealt enormous investment portfolio losses based upon bond holdings now trading at distressed levels. This is not surprising however, as the Government has proved thus far that it does not possesses the ability to read even a half-move ahead in any situation.

The sad thing is, credit market disruptions in September were a result of fear of institutional failure, while today, the Government has become the Ogre that the village fears.
TheValueatRisk.blogspo...

Mar 10 12:41 PM

[Sudhakar2k:]

Mind sharing what exactly you used to do your calculations cause I my numbers come out to be quite different for a lot of these banks.

Mar 10 01:28 PM

[pacman1947:]

My, my, and Citi's claim that they have positive earnings the last two months set off today's knee-jerk rally!

I suppose that won't last long.

UBS seems to be in real trouble, eh?

Thanks for the eye opener. All we need now is a pint at the local pub to wash down the news.

Mar 10 04:09 PM

[endoftheworld:]

We had $5trillion of mortgage debt in 2000. In 2008, the figure was over $10trillion. With house prices and earnings power of the consumer less than or equal to that in the late 90s, we're going to have over $5trillion of write-offs by debt holders. Guess who owns this debt? What do you think the entire banking sector's market cap was in 2008? and now? And this is only mortgage debt. We're not even considering the commericial real-estate, which along with residential real-estate backs up most of the loans, i.e. assets on the banks books.

Mar 10 04:22 PM

[endoftheworld:]

btw- March 7, 2007 SP500 Financials were worth - $2.7trillion

on March 7, 2008, SP500 Financials were worth $1.9trillion

on March 7, 2009, SP500 Financials were worth $511 billion

Mar 10 04:34 PM

[margel:]

Why are none of the Canadian Banks listed?

Mar 10 06:18 PM

[joco9799:]

Nearly all the money center banks were insolvent during the latin american debt crisis and most survived splendidly... nearly all the medical school residents are "insolvent" when they finally start practicing medicine, but end up in great shape. If you are making money, you can overcome the distortions of this M2M disaster.

Mar 10 07:38 PM