City Bank (CTBK)
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Are Bank Stocks Buyable? [view article]
Marc - If you're referring to chargeoffs when you discuss loan loss criteria, I agree with your logic completely. I pay much more attention to the level of non-performing assets than to chargeoffs, because I believe banks have less discretion in defining NPAs. ReplyAre Bank Stocks Buyable? [view article]
What is the point in owning any bank stocks? Do we have to try to pick an absolute bottom to make money in the long term. Most banks are a black holes of financial nonsense. Nobody really knows what they are worth. I do know that lots of pay option ARMs are going to be adjusting in 2009, 2010 and 2011. So there is no rush to own this toxic waste. ReplyAre Bank Stocks Buyable? [view article]
A large part of my bearish sentiment stems from the systemic deterioration of underwriting standards in the mortgage and commercial loan markets. Standards were relaxed on all programs including prime and AAA commercial credit. I believe that the true scope of the consequences of radically relaxing loan standards right before the economy heads into an average to severe recession will have. In my opinion default predictions for prime, prime jumbo, auto and credit card loans as well as small business loans, construction loans, and floating rate debt held by large corporations are still too low. From first hand experience I can tell you that a significant portion (greater than 20%) of mortgages underwritten and purchased by the GSEs would not have passed muster under any other period and is far from prime quality. While I agree that the more conservative banks stand to profit handsomely with the elimination of overly aggressive competitors and the availability of prime assets which would otherwise never be for sale at discounted prices. At the same time I feel that the credit contraction is only starting in earnest. The issue holding back a more expedient end to the necessary contraction is the low quality and illiquid nature of the assets which need to be liquidated off of bank and other financial companies' balance sheets. Because there are no willing buyers for the fixed income exotica created over the last four years it is incredibly difficult for institutions to fully clean out their balance sheets. Until we see some stable pricing and a slight increase in the number of large distressed debt deals in order to be able to ascertain the eventual trading prices of these massive piles of securities which will ultimately reveal the state of many banks real balance sheet health. Another key factor is the fact that there is no real way to at this point accurately predict where the unemployment rate and the housing drop will end. Until such data becomes a reasonable topic of discussion I feel that it is entirely premature to look for investment opportunities in the banking sector as the outcome of these macro events make such an investment perilously close to a roll of the dice. ReplyGerstein
Are Bank Stocks Buyable? [view article]
I get a sense the market is more or less tuned into credit cards and the employment issue. But the care leases and pay option ARMs still seem to have the potential to surprise. And outside the strict confines of banking per se, people (other than sell side analysts) had been worrying about Lehman and that shoe fell hard. Bear is gone. Now . . . are there any more to surface? So it seems unsurprising that that the banks stocks that bounced most were the most conservative, the type least likely to carry a sustained rally.BTW... the reason I didn't use valuation or loan loss criteria is because right now, I'm not comfortable with the #s. Good loan loss #s may mean good lending habits, or it may mean that they haven't yet ... but will soon .. take the big charges. That would also play havoc with the valuation, metrics. Down the road, once life normalizes (however long that may take), valuation and loan criteria would definitely be important. Reply
Are Bank Stocks Buyable? [view article]
I am very bearish on bank stocks but do agree that these are good screening criteria. There are still four major factors which are likely to mean more trouble for banks.The first is the negative equity in car leases. All truck and many car and luxury car leases written in the last three to four years have residual values significantly above the current market value of the vehicles, in many cases the difference exceeds $10,000 per vehicle (take a look at the prices of used luxury cars and mid size and full size trucks right now and compare them to what they were a year ago for vehicles of similar age and mileage, the difference is shocking) which is a tremendous hit to the institution which must take back and sell the vehicle.
The second issue is the upcoming recast of billions of dollars worth of Pay Option ARMs. These exotic mortgages allow borrowers to pay less than the interest due while growing the balance to a cap of 110%, 115% or in some cases an insane 125% of the original balance. When this cap is reached the payments more than double. Most of these loans were done with no documentation of income and are therefore as toxic as the subprime loans. This will add more foreclosure inventory to the already weak housing market and will severely punish those banks which hold these loans on their balance sheets. The biggest holder of these loans is WB with over $120B in their portfolio.
The third issue standing in the way in the way of a banking recovery is the performance of credit card debt. Because consumers used their home equity lines to pay down their credit card debt during the housing boom/bubble they have found themselves with one last avenue of available credit. Defaults in the credit card portfolios of COF and AXP have accelerated and in my opinion will continue to do so as cash strapped consumers use the credit cards to continue to fund purchases which they cannot afford. At this point these purchases are no longer limited to lifestyle desires such as eating out or new luxury goods but now include the increasingly expensive price tag of groceries and gasoline.
The fourth and final issue is the rising rate of unemployment. Increased unemployment means increased levels of default across all classes of consumer loans, and at some point begins to seep into commercial lending as a slowdown of consumer spending hurts small businesses. The continued rise in unemployment numbers and the acceleration of this trend does not bode well for the banking industry.
As I said before while I fully agree with the authors methodology I still believe that looking into bank stocks is premature at this point and will continue to be premature until a bottom is found in the housing market and a top has been reached in the accelerating unemployment statistics. Reply
Are Bank Stocks Buyable? [view article]
No valuation criteria, e.g. P/B.... ReplyAre Bank Stocks Buyable? [view article]
The list of criteria looks good, but I believe it needs an addition that reflects the level of non-performing assets and the adequacy of the loan loss reserve. ReplyBuy Opportunities Like These Do Not Come Along Very Often [view article]
Tim, I have to thank you!Following your article I went and bought AYR and CTBK. I took a quick look and nothing led me to believe their dividends were significantly at risk so I took a shot with the long-term in mind.
Short-term results are fantastic: The are up 43% and 17% respectively since my purchase of June 25th. Less than a month and a half. This was the first time I read you and I am adding you today, don't want to miss a word from you.
Regards,
Denis Reply
It's Not Citi, But City Bank Not Pretty Either [view article]
Thank you, Tim. I wish everyone was so willing to be upfront. Who among us during the last year or so has been able to consistently make the calls. A year ago, no one would have ever called Wachovia going to a low of around $7.I have to think CTBK has seen its lows, and just like BAC, BBT, WB, etc., CTBK will rise from here, although sporadically. Reply
It's Not Citi, But City Bank Not Pretty Either [view article]
This share is pretty cheap. I bought 1000 shares @ 8.47 ! incredible. I am very glad. ReplyIt's Not Citi, But City Bank Not Pretty Either [view article]
Sam, at this time I am going to the sidelines on CTBK and waiting for a couple of quarterly reports. I will continue to hold a small position, but think they are a couple of quarters away from starting to recover.#190274, you got me. My method is to find stock of little following and news and get in at a good value. CTBK has a 33 year track record of excellent management and I thought they would do better this time. Check Google or Yahoo and tell us how many news articles you can find on this stock. I personally put my money in this stock and will take a loss. Want to share your record here? Reply
It's Not Citi, But City Bank Not Pretty Either [view article]
you pushed this stock when it was 20. On 6/18 you pushed it again. ishould have realized then that you didn`t know what you were talking about. who told you that you knew enough to be a financial writer?Reply
It's Not Citi, But City Bank Not Pretty Either [view article]
I agree with sambordulac that the trend in non-performing assets does not inspire confidence, and I'm surprised that the current level is at 8% for a bank operating in a geographic area that does not appear to have had a real estate bubble. ReplyIt's Not Citi, But City Bank Not Pretty Either [view article]
Thank you for the update, Mr. Plaehn.On the last item of your highlight, my understanding is that the percentage took in both the non-performing assets as well as assets foreclosed (asset owned)--roughly $100 million vs $1,250 million in asset, or 8%.
True, by your projected earnings, the shares are cheap. With business in distress, the central theme may have shifted to whether non-performing loan would continue to eat into capital. CTBK is trading at roughly 75% of its book value. There is no justification unless we can envision that the business would be seriously impaired or that it'll lose some money during this down turn. On the later, I am not all that confident. The NPL+asset owned was less than 1.0% at year end, 4.5% at March quarter and now at 8%. The trajectory suggests that more are to come. Recovery rate can be as low as 60% on uncompleted projects or land. I feel the reserve (1.5%) may not be adequate to cover the 8% reported dead money.
So, I think the market may be right in assigning a value below book. However, I don't see the company go under unless the Puget Sound area RE market experience long and deep decline. 17% in tier-1 capital probably would make it the last bank standing.
I am interested in purchasing additional shares. I'd be interested to hear what you think.
Regards, Sam Reply
The Long Case for City Bank [view article]
Now (end of the second quarter) non-performing assets are up to $103 million, with a $14 million loan loss reserve. I would want to see the NPA figure coming down before I invested. Reply