The Wall Street Journal has a nice article outlining the financial situation at the major banks, and an impressive graphic which goes with it. But for Bank of America (BAC), which does need to raise a substantial amount of capital, most big banks have come out relatively unscathed.
Media Campaign Gets a Big Thumbs Up
The administration has done an excellent job in managing the market during this process. The banks have been under strict instructions not to say anything about the results. However, the results have been selectively leaked to the media. The leaks have reinforced the belief that the banks are in much better shape than some of the naysayers were claiming. This has resulted in a massive rally in financials this week, further helping the ability of the banks which need capital to raise capital if needed.
Regional Banks: Where are the Leaks?
If there is one glaring gap in the leaks is that there is a virtual black-out about the health fo the regional banks. There has been no leaks about the capital requirements at the regional banks BB&T (BBT), Fifth Third (FITB), KeyCorp (KEY), PNC Financial (PNC), Regions Financial (RF), SunTrust (STI) and US Bancorp (USB). Many of these banks, especially Regions, do not have a large cushion of preferred capital to convert to common.
Risk Concentration: Geographical and Commercial Real Estate
More important, they have a large exposure to commercial real estate and construction investing. Unlike the large banks whose exposure is primarily to consumers via credit-cards, auto-loans and of course home mortgages, the smaller regional banks are tied much closer to the business activity in their local region and are hence less diversified geographically.
The commercial real estate market is going through a painful recalibration where investors now expect much higher cap rates as the massive risk taking of the past few years is coming back to haunt the markets. When the economy resets at a smaller size before growing up, it may take years for the excess capacity to be absorbed, forcing many of the leveraged deals used to finance new commercial real estate to teeter on the verge of bankruptcy.
Time to Book Profits?
As I noted in an earlier post, I have established a position in FAZ, in anticipation of some profit taking. I am also concerned that the lack of any leaks about the regional banks does not portend well for what we are likely to hear.
Disclosure:I hold a short position in financials via FAZ in my trading account. I also hold stock and options in other financials including Citibank, Ultra 2X Bull (UYG) in other accounts.