Recent Bank Share Sales Could Lead to Industry-Wide Sell-Off

My BNET Finance colleague Alain Sherter highlights an interesting phenomenon in a post here Thursday:

Beaten down regional banks badly need capital, and they think they know where to find it: the public market.

Zions, a $53 billion-asset banking company based in Utah, on Thursday affirmed its plan to raise $250 million in a secondary stock offering. Another large regional player, Synovus, earlier this week announced it would seek to raise up $350 million in a stock offering, part of a broader plan by the Georgia company to add $500 million in capital. Also this month, Ohio’s Huntington Bancshares said it plans a stock offering expected to raise up to $150 million.

This is something that I predicted would become a trend back at the start of the month (see story here), when it became apparent that small and medium-sized banks would have to raise up to $21 billion from investors in the event of a 20 percent market downturn.

Banks, I argued then, would begin to employ the same kinds of financing tactics that small biotechnology firms do, raising capital when they can (that is, when their stock price is high), as opposed to when they have to because of a liquidity crisis.

Alain writes that “the stock offerings will test the market’s confidence that regional banks can bounce back.” As an example, he points to Nasdaq-listed Zions Bancorporation (ZION). Zions is an excellent example of a bank financing itself very much as a pre-revenue firm does. While the stock is down 25 percent year-to-date, it has risen 38 percent in the past 3 months.

That’s some serious volatility: Zions is underperforming the S&P 500, of which it is a tiny component, by around 40 percentage points on the year, but it is outperforming the index by 22 percentage points in the past 3 months. It is one of the reasons leveraged quantitative index funds such as the recently-launched CSM 130/30 index ETF ramped up short exposure in the stock late last month.

After a share-sale, it’s common for a stock’s value to fall a bit. But the risk with this capital raising strategy for banks is that they don’t resemble pre-revenue firms in the sense that they all have more-or-less the same operating criteria and capital-shortage timelines. As a result, one or two small bank share-sales at once might well set off a collective sell-off in the industry, forcing their already badly-capitalized rivals into a tight squeeze.

Needless to say, that will lead to more bankruptcies, much more industry consolidation, and a further round of cash-hoarding.

Comments

[Joe Shareho...:]

Zion was trading at $10 just two months ago, then hit $20 last week. That's a 100% jump in around two months. Should be back to $10 within the next two. Here's why: The real-estate picture in Utah is not pretty. The bubble, which began in 2006 lasted well into 2007, so prices there didn't start falling until 2008, a good year and a half after much of the rest of the nation. Should still have a ways to go. Worse than that for Zion, its other branches in Nevada and California are in real-estate challenging areas as well. This bank is well capitalized, but faces serious issues ahead.

Sep 20 08:06 PM

[David White:]

Good point. I agree with most if not all of what you have said about Zion. There is one possible gotcha though. The run up of the "too big to fail" banks occurred as they were raising capital through new stock offerings. Apparently the market was so happy to be able to think that the banks were relatively solvent that the fact that they were diluting share value did not seem to matter.

About 94 banks have failed so far this year. The most recent estimates are for 1000+ banks to fail within the next two years. The low estimate is probably about 400. Apparently the commercial mortgage market will do in quite a number of banks. If Meredith Whitney's prediction for a 25% decline in the residential real estate market comes true, the number may be more than 1000. Of course, the government (and the Fed) will be trying their hardest to prevent Meredith Whitney's prediction from becoming true. I personally hope they are successful in this endeavor.

If you are looking for Zion to go down by 50% in the next two months, that could happen. However, if it does, it will likely be because the entire market falls about 20% to 35%. Since fair value of the SPY is currently about $85 to $88, it would seem it should fall at least 20% from the $106.72 close on Friday. The recent high was approx. $108.

In addition Prechter is predicting a near term USD rally due to its only 3% bullish sentiment at the moment. This was the sentiment low that the equities markets rose from in March. If such a rally occurs it will likely cause equites and commodities to go down. In addition it may actually lead to money being taken out of world markets due to the unwinding of the USD carry trade. This might well cause an overshoot of the fair value point on the SPY.

I am trying to remain neutral at the moment. However, I am looking to enter a few down side trades soon.

At the end of last week I predicted the USD would rally into Wednesday's Fed announcement. I don't actually expect the Fed to change the rates. However, they may announce that they are cutting or cutting back on one or more of the stimulatory (inflationary) programs. Such news would likely cause the USD to rally (and stocks to fall).

It would appear that the rally in the USD is occuring so far this week. The USD Index is up +.54% so far on Monday. Gold futures are down almost $9. This should lead to a negative day Monday in US equities markets (presuming the USD does not reverse course dramatically Monday).

Sep 21 03:10 AM

[Michael Clark:]

Isn't Zions the most exposed regional bank to commercial real estate defaults?

Sep 21 06:20 AM

[User 377931:]

The reason we dont see more bank failures when obviously there should be is simply because the FDIC cant afford to go after all the banks that need closing. The cost of closing the number of banks that need to be closed would be astronomical and the government is managing this process and not doing what needs to be done efficiently. It's quite amusing how many people dont understand how much data is being manipulated and how many holes actually need to be plugged.. What's even more amazing is how borderline criminal so many of the govermenets actions are. If you or I did half the things they are doing we would be in jail... Amusing to say the least. It's gonna be pretty funny when Americans refuse to pay their taxes in masses - that day is surely coming...

Sep 21 11:08 AM

[user 489326:]

I find it amusing how many people think that everything is manipulated, except for those things that support their point of view.


On Sep 21 11:08 AM User 377931 wrote:

> The reason we dont see more bank failures when obviously there should
> be is simply because the FDIC cant afford to go after all the banks
> that need closing. The cost of closing the number of banks that
> need to be closed would be astronomical and the government is managing
> this process and not doing what needs to be done efficiently. It's
> quite amusing how many people dont understand how much data is being
> manipulated and how many holes actually need to be plugged.. What's
> even more amazing is how borderline criminal so many of the govermenets
> actions are. If you or I did half the things they are doing we would
> be in jail... Amusing to say the least. It's gonna be pretty funny
> when Americans refuse to pay their taxes in masses - that day is
> surely coming...

Sep 21 07:40 PM

[geewow:]

How anyone can ignore the fact that this market is manipulated is beyond my understanding. The Fed makes available billions and that same amount corresponds to shares purchased. Bernanke is pumping cash into the market through the back door with zero interest loans. He is recapitalizing the financial banks in order to cover his butt as Treasuries get sold, and soften the inevitable blow when the toxic mortgage debts must get exposed.

When the market begins to drop, it will be quick. Investors will be taking a big hit. Unless you are very vigilant in monitoring your portfolio, I would be very nervous.

eye-on-washington.blog...

Sep 21 09:17 PM

[Buckoux:]

That deserves a big "AMEN!"


On Sep 21 11:08 AM User 377931 wrote:

> The reason we dont see more bank failures when obviously there should
> be is simply because the FDIC cant afford to go after all the banks
> that need closing. The cost of closing the number of banks that
> need to be closed would be astronomical and the government is managing
> this process and not doing what needs to be done efficiently. It's
> quite amusing how many people dont understand how much data is being
> manipulated and how many holes actually need to be plugged.. What's
> even more amazing is how borderline criminal so many of the govermenets
> actions are. If you or I did half the things they are doing we would
> be in jail... Amusing to say the least. It's gonna be pretty funny
> when Americans refuse to pay their taxes in masses - that day is
> surely coming...

Sep 22 12:40 PM

[Free Falling:]

Zions is run by a group of greedy LDS types that hedged everything that real estate could only go in one direction.....they have paid the price and will continue to as the Utah, California, Arizona & Nevada continue their crash.

Zions also managed to find an oil refinery to heavily invest in that had speculated that oil prices would only go in one direction.

Is there a pattern here?

Sep 22 02:49 PM