Nearly every major commercial bank has reported earnings over the last week. The results have ranged from an $8.8 billion dollar loss at Wachovia (NASDAQ:WB) to a $3.4 billion dollar profit at Bank of America (NYSE:BAC). The bank’s capital ratios have stayed adequate for the most part, even if it has meant changing the charge off procedure, as in the case of Wells Fargo (WFG).
The perceived improvement, or for that matter the perception that the losses have peaked, has caused one of the greatest short-term rallies in the history of financial stocks. Yet, I still worry that the hardships facing the commercial banks are nowhere near complete and as a result the current rally will prove to be merely a painful remainder of how much further the bank stocks have to fall to account for the near continuous addition of delinquent loans to their books.
I strongly believe that the amount of loans that are between 30 and 89 days delinquent are a great indicator of future issues in any banks’ loan portfolio. Unfortunately, these figures are never included in the banks' quarterly press release and are rarely included in the banks’ 10-Qs. As a result, individual investors must search out the call reports put out by the FFIEC, these reports can be found here, it should be noted that these reports show the health of the bank only and not the holding company. These reports are tremendously detailed and allow for a much more detailed examination of any banks books.
The one drawback however is that the banks typically take over a month to file the reports; as a result, investors are left in the dark in the time period immediately following the standard quarterly release. For long term investors, I believe that it is imperative that one waits until the call reports are filed with FFIEC in early to mid August before taking a position in any bank, as we will then be able to see the trouble that the banks have gotten themselves into over the summer. As of 3/31/08 the following major banks had a substantial number of loans that were 30-89 days delinquent:
Wachovia (WB): In excess of 5.3 billion
Washington Mutual (NYSE:WM): In excess of 5.2 billion
Wells Fargo (NYSE:WFC): In excess of 5.4 billion
Bank of America (BAC): In excess of 8.3 billion
JPMorgan Chase (NYSE:JPM): In excess of 6.9 billion
U.S. Bank (NYSE:USB): In excess of 1.3 billion
Citigroup (NYSE:C): In excess of 13 billion
These figures should remind us that there are still considerable losses in the pipeline, on top of those loans that will become delinquent in the second quarter. As banks do not have to start reserving for losses in these loans until after 90 days it is possible that the worst is yet to come for these banks, especially if a significant number of loans become delinquent over the summer.
Generally speaking, these loans do not start to bring about a deterioration in the capital base and capital ratio of banks until after 90 days. The possibility of increased delinquencies and the potential capital raises that could follow is why I would advise waiting until the 2Q call reports come out in mid August before investing in any bank stock.
I have talked a little bit about how these early delinquencies can be included in calculations to figure out the strength of a particular bank here, I believe my article on a potential “California Ratio” is worth a review going into the release of the 2Q call reports. Especially if one is considering taking a long term position in one of our country’s many regional and national banks.
For Further Review: FFIEC Website