Banks are the financial core of an economy. And for many of the world's banks, it is truly the worst of times. They're woefully short of capital. They're buried under debts they can't pay back. And, they're facing a chronic on-again-off-again global slowdown.
Some are up to their eyeballs in sovereign debts - securities whose values are dropping like rocks. And for lifelines, they're relying more and more on the whims of central bankers and politicians.
No wonder investors are fearful of failures by foreign banks. And, no wonder investors are skeptical of the promise European governments have made to stand behind their banks when they may not have the financial firepower to do so.
With the complex web of today's financial markets, it is no longer wise to ignore what's happening outside our own sovereign borders. We have to question whether the bank we do business with is connected to a bank in Spain or Italy ... and, whether that bank is financially healthy.
So, if you own stocks or bonds issued by vulnerable institutions ... keep your money on deposit with them ... or rely on them to help fund your business investments or consumer purchases ... now is not a good time to take your eye off the ball. The potential for losses are staggering, and the list of potential casualties is long.
At the same time, a select few global banking institutions are poised to prosper with strong balance sheets and good liquidity. And, if you are an astute and agile investor, you might just find profit in a market mismatch or institution flaw.
From either viewpoint, foreign banks, once considered mere blips on the U.S. radar, now deserve much closer scrutiny.
Of the 43 countries and 206 banks covered in the soon-to-be released Weiss global bank ratings, the countries with the highest percentage of weak banks are Germany, Greece, Italy, and Spain.
Let's take a closer look ...
Germany, Greece, Italy and Spain account for 14 percent of all the banks reviewed, but account for one-third of all the weak banks (Weiss Rating D+ or lower) and almost 70 percent of all the "E" rated or very weak banks on the list. Combined, these countries have 90 percent of their ratings in the weak or lower category. Only one bank in these countries has a "fair" rating.
Here, we spotlight the weakest of the weak in those countries so you'll know where trouble brews. And, we also point out one interesting Italian standout that shines relative to its European brethren.
Germany's Deutsche Bank (DB) is the largest bank in the world with more than $2.8 trillion and a Weiss Financial Strength Rating of D (“Weak”). The institution has problems with low capitalization and weak profitability. Asset quality, liquidity and stability results are considered fair at best. Its tangible common equity ratio is 1.75 percent, one-fifth of the 8.36 percent average for all 206 banks analyzed. Its return on assets of just 0.14 percent is also far below the average of 0.89 percent.
The National Bank of Greece (NBG), with total assets of $155.3 billion, is the largest rated bank in Greece with a Weiss Financial Strength Rating of E+ ("Very Weak"). The bank has very poor asset quality with nonperforming loans representing 83 percent of its core capital - almost three times the average of 31 percent for the global banks covered. Profitability over time has also been very low indicating operational instability. The bank's five-year average return on equity is -3.5 percent compared to the average of 9.6 percent.
In Spain, Banco Santander (STD) dwarfs the rest of the nation's banks in size. With $1.6 trillion in assets, it has more than twice the assets of the next largest bank. All the banks in Spain were found to be "Weak" or "Very Weak." None were rated higher than a D+. Banco Santander has very poor asset quality with 45.54 percent of its core capital exposed to nonperforming loans. Net charge-offs as a percentage of total loans are high at 1.9 percent, or two and a half times higher than the average.
Italy's UniCredit SpA (UNCFF.PK), with total assets of $1.2 trillion, is the third largest of all of the banks we’ve identified as “Very Weak” assigned an “E+” financial strength rating. Asset quality is very weak with nonperforming loans making up 11.2 percent of the bank’s total loan portfolio and representing a staggering 152 percent of its core capital. Profitability ratios are all below industry averages: Return on assets at 0.23 percent, return on equity at 3.06 percent and operating income to total assets at 0.37 percent. Liquidity is also weak with cash and equivalents to total liabilities of 0.78 percent, well below the average of 5.81 percent.
And while Italy has its financial problems too, there is one Italian bank that may be a ray of hope in this plethora of financial ruin - Mediobanca, S.p.A. (MDIBY.PK). With total assets of $99.1 billion, this institution has a financial strength rating of C ("Fair"). We don't normally get excited about a C rating, but given the environment Mediobanca is functioning in, this C rating is something to feel positive about. Capital and asset quality are strong. It has a high tangible common equity ratio of 7.6 percent, and nonperforming assets make up only a slight 0.99 percent of its total assets, less than half the average of 2.38 percent. Mediobanca is also on the Weiss, Undervalued Global Bank List from May 22, 2012.
Given the interconnectivity between global markets and banks, there is obviously an increasing need to understand the global banking system and its individual players. So, why not rely solely on the ratings of major agencies Moody's, S&P and Fitch?
Unfortunately the public record of their financial ratings reveals a series of failures that have caused losses to millions of investors. When major Wall Street firms, Bear Stearns and Lehman Brothers suffered deteriorating finances, they still gave those firms ratings in the "A" range. We all witnessed a similar pattern with the failures of New Century Financial (2007), Countrywide Financial (2008), Washington Mutual (2008) and Wachovia Bank (2008).
Congress, regulators, investors and some of the agencies' former executives generally agree that the primary factor behind the inflated agency ratings were conflicts of interest between the agencies and the issuers. And those conflicts have yet to be eliminated.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.