The Financial Sector Conundrum

This year has indeed been a really interesting time for financial stocks.

Most of them have had their stock price literally destroyed; a few are no more; fewer are astonishingly at their highs. Generally it has been a very tough time for every company operating in the sector. Some of them, however, have faced the storm in a privileged position and are actually in better (price-wise) shape at this time.

Take the almighty Goldman Sachs (GS). Encircled by universal admiration, it has seen its share price barely punished by the worst market ever for financials. From last October to the present day, it has lost 32.5%, a very good performance if you compare it to the sector's index; a stellar performance if you compare it to  peers or financial insurers, down even 70-80%.

Financial insurers could be very well a good subject for another article, or you can rely on this excellent piece, so I'll pass over them today. But take for example, Regions Financial (RF), whose share price has been curtailed nearly 70% in the same period. Why this enormous difference in their performance? You'd think it's a function of their operating performance or other real world reasons.

Alas, I'm afraid it's just a function of the market schizophrenia I talked about in my last report.

The perception about the operating performance of Goldman is very good; everybody and his wife talk about how smart and dandy this bank is. I guess they refer to the shorting of the very crap it was at the same time selling to its clients. Ethics aside, it's true that Goldman earnings have been very solid, even in these tough times. It's also true, however, that even Regions' earnings performance has been very good; in the last 5 fiscal years to 2007, it earned north of $5 billion dollars, never showing a loss, not even in this year first half (quite the opposite, in fact; it earned a healthy $540 million).

So maybe it's because of an untenable leverage of Regions' balance sheet. But wait, its leverage is 7.2, not the end of the world for a bank, I'd say. An untenable leverage seems rather what Goldman presents: its assets are 24 times equity. And I don't think that all the crap is on the Regions' assets side, while all the pearls are on the Goldman one.

Why then that different share performance? Why does the market thinks it's right to value Regions at 0.32 times the book, while Goldman deserves a rich 1.6 times book?

Apart from some obvious differences in their business (I'd think anyway that would put more risk on the Goldman side), they differ in the real world in one thing. That is, in the last 22 quarters (5.5 years) Regions has delivered almost $9 billion of free cash to the shareholders (it now capitalizes just two thirds of that figure), while Goldman operations in the same period have used nearly $170 billion. Yes, you read it right: while Goldman posted exceptional profits, its operations bled $170 billion of cash in five and a half years.

(Someone someday will explain how that's possible, and I think he will turn to metaphysics.)

So I must confess to be at complete loss here.

Disclosure: no personal positions. RF is a pick of my model portfolios.

Comments

[boboboy:]

Does nobody read this site? I've been in RF in one way or another for years & years; is it perfect? Of course not; is it good? it's among the very best regional banks. What justifies the destruction of RF? Nothing I can see, but some larger bank (perhaps the glamorous Goldman!) can now buy RF for a fraction of its value (and a big loss for me). Unbelievable. Plain, simple panic can't be explained rationally, I think.

2008 Aug 13 12:45 PM

[friend:]

Would there be a strong law firm willing to represent those investors losing most if not all of their equity in RF , from May to date , so that a class action can be initiated against the naked short sellers and their associates ?

Naked shorting is the unlawful tool used to drive down the equity of RF drastically .

The forever depleting prices on the RF would naturally force the average investors into a panic sale or margin call sale .

The honest and average investors lost all in a couple of months time , without knowing what has struck them .

All money made using an illegal tool should be returned to the victimized investors .

2008 Aug 14 02:39 AM

[Billion003:]

Why isn't Regions in the article here "Which Banks Will Survive?"

2008 Aug 15 04:58 PM

[Billion003:]

Why isn't Regions in the article "Which Banks Will Survive?"

2008 Aug 15 05:02 PM

[Scooter-Pop:]

RF's service side, the Bank Lobby Side, has come under scrutiny due to waning performance. Put another way, the measure of Banking Services is at par with the Stock Price, Deteriorating! Speculation has it that a Good Service is worth paying for, maybe the reason RF's Capitalization is now a concern. Grow those deposits and expectations brighten! Wonderful to see the Top Brass buying their Stock (INSIDER TRADES), definitely a start in the right direction.

2008 Aug 22 09:57 AM