Bank Exposure to Freddie/Fannie Securities: Do Your Homework

Much has been made of bank exposure to Fannie Mae (FNM) and/or Freddie Mac (FRE) securities exposure. This is to be expected given the current state of affairs.

The following examples of financial institutions and their exposure, as disclosed on or about July 20, 2008, should be noted and applied towards any financial security considered for investment.

Company	$Exposure	Pref.	Debt.	% of tangible equity
Wells Fargo (WFC)	480m	480m	0	n/a
Fifth Third (FITB)	68m	68m	n/a	1.2
U.S. Bancorp (USB)	97m	97m	0	0.9
BB&T (BBT)	310m	0	310m	4.4
Sovereign Bancorp (SOV)	823m	n/a	623m	14.5
M&T Bank (MTB)	352m	162m	190m	11.3
Synovus Financial (SNV)	100m	100m	0	3.4
Huntington (HBAN)	350m	0	350m	14.8
WestAmerica (WABC)	45m	0	45m	16.4%
Valley National (VLY)	70m	70m	0	9.2%
EastWest Bancorp (EWBC)	45m	0	45m	6.3%
Wilmington Trust (WL)	42m	0	42m	6.2%

These are but a few examples of financial institution equity tied up in the FNM/FRE situation. The point being, investors should inquire as to institutional exposure to risky securities, and especially the amount of FNM/FRE exposure, before speculating in the stock. The latest available data may give an incorrect picture of current circumstances. But one has to start somewhere, and the financials with the cleanest balance sheets should reign supreme as portfolio candidates.

Being able to raise capital presents another issue. Two days ago, I listed several regional banks that I believe are worthy of research leading to speculation. While there are doubtless others, many other banks simply will not be able to raise sufficient capital to maintain operations. 19% of the top fifty banks have cut dividends this year, and more may follow as the dividend payout rate for large banks is now at 62% of the historical median, compared to 42% norms of previous eras. BAC and SNV appear highly vulnerable to a dividend cut, to name but two. Total return of many will be limited.

Banks exposed to GSE preferred stock and other potential capital pressure are out there, but overall I believe the situation is manageable. Certain small banks that have problems raising capital and/or have a high exposure to GSE's may flop. Most at risk appear to include EWBC, MTB, SOV, VLY, WABC and WL.

This is not to say that the investor with a speculative inclination should not take a flier on banks that may turn out to be winners with total returns. What I am stating is that careful examination of current exposure to what amounts to be piles of financial manure needs to be researched to avoid stepping into the dung, as some proclaim the worst to be over in the financial sector.

Comments

[blondino:]

nice summary, thx.

2008 Sep 11 04:22 AM

[Steven Hansen:]

good data.

2008 Sep 11 04:52 AM

[Ishortyou:]

thank you for the homework! keep it up!

2008 Sep 11 05:54 AM

[Eagle1045:]

I believe the writer fails to differentiate between the preferred which is likely worth little from FNMA and Freddie Mac debt which is a high quality credit.

2008 Sep 11 09:09 AM

[jimmy46:]

THX for the info,
Where did you get it?

Anything on: FBC, ZION, MI RF, UMPQ ???

2008 Sep 11 01:52 PM

[PeteK:]

Thanks for the info. Know what to do tomorrow. Keep on doing the good work, it certainly helps many investors.

2008 Sep 12 12:48 AM