Philip Gvinter

Now's the Time to Buy Bank Stocks

I also have to say that transparency is critical here. I am very leery of the overly optimistic and rather opaque numbers reported by JPM, WFC, BBT, and to a lesser degree USB. I feel that the lending standards industry wide were relative cookie cutters for each individual asset class (subprime, alt-a, option arms, prime jumbo, GSE saleable, etc.) and that the real qualitative difference was the level of exposure to the given asset classes and business models. Originate-to-securitiz... is pretty much dead. Option ARMs are the most toxic waste still outstanding but the big players (CFC, WB, WM, DSL, FED, BKUNA, AHM) are either dead (AHM, WM) on life support (DSL, BKUNA, WB) or a great short (FED.) The one thing that I think we can really learn from is the approach that institutions have taken to deal with the issues. Those who have maintained relatively high transparency are absolute steals at these prices as long as they are solven. Those who moved held-for-sale assets into held-for-investment in order to avoid taking writedowns and who seem to have default rates which seem lower than those which should come from their lending program mix look very suspicious and like the next CFC or WB.

Now's the Time to Buy Bank Stocks

I could not disagree more with the author. I have followed the banks closely and feel like the supposed "high quality" banks like USB, BBT, WFC, JPM, ZION, Hudson City and others who are trading near Jan 08 levels are ripe for a short while the heavily discounted but still solvent like SOV, FHN, perhaps NCC and others who are beaten up but who have taken the lumps they have coming to them (ALT-A wirtedowns >35% and done with their subprime) will do well on a relative basis. The problem is its very difficult to tell who is still solvent.

In the case of the "better banks" these valuations are CRAZY. They are trading at a huge premium to the rest of the peer group with no bottom in sight for either the housing market or the economy in general as unemployment continues to increase. Wells and BBT have lots of ALT-A, Prime Jumbo and construction loan exposure. These guys have painted a very optimistic picture by announcing default rates that are still below 1%. This cannot continue and they are being priced as if it can. I am not saying that these well run banks will collapse but simply that they have too high of a price premium relative to their peer group as well as an unrealistic future P/E which does not price in the issues they will inevitably face. In my opinion all of these stock still have anywhere between 25% and 75% downside risk as their earnings see the effect of a 2% to 3% default rate across their loan portfolios.

As for the "bad banks" some have taken aggressive writedowns on their held-for-investment portfolios which will exceed actual losses. Many have also faced the majority of their portfolio stress test on asset classes which are nearing the peak of their impairment or have even moved beyond that point. I believe that C at $15 or lower is a buy for this reason. I also feel that ALT-A loans should be separated into two distinct categories, Option ARMs which are toxic waste and regular ALT-A which will have high but not astronomic default rates and loss severity. The difficulty lies in identifying the banks who are furthers along in their portfolio stress test but who are still fundamentally solvent. SOV in my opinion belongs on this list. I need to gather more data on FHN and NCC but feel that they are strong candidates.