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Biz Links Current Issue Q3-02 Index Q2-02 Index Q1-02 Index Q4-01 Index Q3-01 Index Q2-01 Index Q1-01 Index Prior Financial Services Updates July 2005 June 2005 May 2005 April 2005 March 2005 Feb 2005 Jan 2005 Dec 2004 Nov 2004 Oct 2004 Sept 2004 August 2004 July 2004 June 2004 May 2004 Feb 2004 Jan 2004 Dec 2003 Nov 2003 Oct 2003 |
Monthly Sector Summary During August, large-cap banks fell 1.62% to a year to date loss of 6.20% from July's loss of 4.65% and yields rose 17 basis point to 3.71% from July's 3.54%. The ten year treasury ended the month at 4.02% [vs 4.28% on 7-29 - a rise of 26 basis points]. During July, large-cap banks rose 1.48% to a loss of 4.65% from June's loss of 5.96% and yields fell 4 basis point to 3.54% from June's 3.58%. The ten year treasury ended the month at 4.28% [vs 3.91% on 6-30 - a rise of 37 basis points]. During June, large-cap banks fell to a loss of 5.96% from May's loss of 5.59% and yields rose 1 basis point to 3.58% from May's 3.57%. The ten year treasury ended the month at 3.92% [vs 4.00% on 5-31 - a fall of 8 basis points]. US Banks' Margins Fall to 15-year Low, FDIC Says Jonathan Stempel, Reuters 8-25 Rising short-term interest rates, and the failure of long-term rates to rise with them, have caused margins at federally-insured banks and thrifts to shrink to their lowest level in 15 years, the Federal Deposit Insurance Corp. said on Thursday. Ten Federal Reserve interest rate hikes since mid-2004 have forced banks to pay depositors more, and to pay more on their own borrowings. But competition among lenders and a reticence of companies and individuals to borrow beyond their means keeps lending costs down, amid concerns the economy might slow, oil prices might spiral higher, and real estate prices might fall. Less-than-ideal rate bets already cut into second-quarter profits at such giants as Citigroup, Bank of America and JPMorgan Chase. "Banks are trying to push out loans that fewer people may want as the economy slows, while their favorite user of money, corporations, still have tremendous amounts of cash on their balance sheets," said James Cusser, senior portfolio manager at Waddell & Reed Investment Management Co. "Bigger banks would like to do more commercial lending, and if there's not enough demand for it, they have to cut their prices." The FDIC said net interest margin, the difference between what banks earn on loans and pay on deposits, fell to 3.49 percent from 3.53 percent in the first quarter. Margins are now the lowest since the third quarter of 1990, when the U.S. economy was in recession. Overall second-quarter profit at the 8,868 institutions insured by the FDIC fell 3.3 percent from the first quarter to $33.1 billion. Large institutions are feeling more pain because they rely more on short-term borrowings for funding, the FDIC said. Banks Go Begging for Consumer Loans Liz Moyer, Forbes 8-08 Booming deposit growth has outstripped loan demand, forcing bankers to scratch for assets that can help relieve some of the pressure from narrowing profit margins. Much as been said about the shrinking gap between short- and long-term interest rates--what the banks call "the yield curve"--and that is partly to blame for the struggle to squeeze profits from lending. Intense competition for corporate and industrial loan business is another problem as banks cut deals and lower underwriting standards to win loan assignments. "Big banks need asset generators, and corporate loans are just not profitable," says David Hendler, an analyst at CreditSights. "Consumer loans are needed." What's so magical about consumer loans? They are short term, and their interest rates move quickly when the Fed takes action. Credit cards, home equity and auto loans have higher rates that create wider spreads to the deposits banks use to fund them. Last month, Bank of America announced a $35 billion deal to buy credit card lender MBNA. HSBC Holdings' bought smaller credit card lender Metris for $1.6 billion. Earlier this year, Washington Mutual agreed to buy credit card lender Providian for just over $6 billion. Top executives at Wachovia are yearning to get back into the credit card business. Lending experts say the trend in favor of consumer loans should continue for the foreseeable future. Mortgage demand is strong, according to July Fed data. Commercial loans are also growing according to the Fed, though RMA, a credit industry group in Philadelphia, reports that commercial and industrial loans are not as robust as a few years ago because would-be borrowers still have enough cash on hand to fund operations. Aiding Profits At Some Banks: Setting Aside Less Valerie Bauerlein, WSJ 8-22 The narrowing spread between short- and long-term interest rates is squeezing net-interest margins at some of the nation's banks. And as that so-called yield curve flattens, competition for loans and deposits is intense. So how did KeyCorp manage to increase its profit 22% in the second quarter? It was easy. The Cleveland bank, with branches in 13 states, slashed the amount set aside for loans that might go bad. By adding only $20 million to its loan-loss reserves, instead of $74 million in Q2-04, KeyCorp boosted the bottom line by about $39 million -- or eight cents of its per-share profit of 70 cents, or $291 million. Without that, KeyCorp would have fallen about two cents short of Wall Street profit targets. KeyCorp says its loan-loss reserves remain adequate and compare well with peers' reserves. Saving less for a rainy day is becoming a popular earnings-enhancement strategy at U.S. banks increasingly stretched for profit growth. More than a dozen major banks took a lower loan-loss provision in the second quarter compared with a year earlier, and the industry's loan-loss reserves as a percentage of total loans and leases are at a 19-year low, according to the FDIC. Besides some banks helping their profits with gains that don't necessarily reflect underlying success in attracting borrowers and depositors, some analysts are worried the banks are setting themselves up for trouble should the economy stumble. The inevitable loan-quality crunch might be particularly rough on such banks, which would need to replenish their reserves, badly bruising earnings as a result. "Things are as low as they can go," says Kevin Fitzsimmons, an analyst with Sandler O'Neill & Partners LP. Banks have wide discretion on how much to set aside for problem loans. They typically study economic models, the recent performance of their loan portfolios, financial condition of large customers and a variety of other factors such as vacancy rates in local real-estate markets. "There is a lot of art and not solely science," says Robert Storch, the FDIC's chief accountant. Regulators haven't made it easy for bankers to determine the magic number. The FDIC favors relatively high loan-loss reserve levels, while the SEC has been pushing banks to sock away less as a way of making it harder to juice earnings. The two agencies issued joint guidance to the industry in 1999. Mr. Storch says the FDIC closely tracks whether provision levels are "directionally consistent" with loan quality. The trend toward lower loan-loss reserves has been around for several quarters, but the temptation to set aside less to cover problem loans has intensified as banks face stronger head winds, including from the challenging interest-rate environment. It isn't unusual for smaller loan-loss provisions to produce big benefits on the bottom line. In its latest quarter, Cleveland bank National City Corp. set aside $26 million, down 57% from its loan-loss provision in Q2-04. The move accounted for four cents a share out of the bank's reported profit of $625 million, or 97 cents a share. Thomas A. Richlovsky, National City's treasurer, says credit quality has improved beyond what the bank expected because of the robust economy, consumer confidence and other factors. Nonperforming assets, or loans where principal and interest aren't being paid according to the original loan terms, fell to a scant 0.54% of National City's total loans as of June 30 from 0.64% a year earlier. The loan-loss provision by Comerica of Detroit, plummeted 90% to just $2 million, adding seven cents a share in profit, which reached $217 million, or $1.28 a share. Comerica's lower provision is based completely on the strength of its loans, says Treasurer Paul E. Burdiss. Earnings benefited, he says, but the lift is a bonus the bank recognizes as temporary. "Things can't continue to get better in sequential quarters forever," Mr. Burdiss says. Banks defend such moves, contending that sky-high credit quality means there is less of a need than in the past to bolster the financial cushion that helps banks absorb losses from loans that must be written off if the borrower can't pay. In fact, the industry's total loan-loss reserve as a percentage of problem loans and leases is at its highest level since 1999, according to the FDIC. Ed Najarian, an analyst at Merrill Lynch, expects credit quality to slip at least a bit next year, forcing banks to set aside more for problem loans. David George, an analyst who covers KeyCorp at A.G. Edwards, which owns stock in the bank, says he frets more about what further flattening of the yield curve could do to bank profits. Since banks typically borrow at short-term rates and lend money at longer-term interest rates, a narrowing spread cuts into profits. Still, the ability of many banks to enhance net income by setting aside less for a rainy day is "something that's just not sustainable over time," he says. Wachovia Raises Dividend PRNewswire 8-16 Wachovia's board of directors today approved an 11% increase in the company's regular quarterly cash dividend to 51 cents per common share, up from the current 46 cents per share. The new common stock dividend is payable on September 15, 2005, to shareholders of record as of the close of business on August 31, 2005. Also, the board authorized the repurchase of up to an additional 100 million shares of Wachovia's common stock. Michael K. Farr, president of investment firm Farr, Miller & Washington Likes BAC BusinessWeek 8-24 We're more cautious than ever on the financial stocks. There are still those that we like, though we have modified our expectations for them. Bank of America is yielding 4.6%, and it's trading at 10 times earnings. Earnings are forecast to increase almost 10% per year over the next few years, and that's a rate superior to the average S&P 500 stock, and the multiple is significantly lower than an average S&P 500 stock. With the 30-year Treasury bond paying 4.4%, we think a position in Bank of America makes sense for our investors. Kenneth Shea, managing director of S&P's Equity Research, Likes C & BAC BusinessWeek 8-22 S&P recommends investors market-weight the financial sector, as a flattening yield curve normally portends a challenging earnings environment for banks. We do believe that this potential negative is offset some by relatively attractive valuations. S&P recommends investors buy (strong buy, 5 STAR) Citigroup, as we believe Citi's wide geographic presence and diverse business mix position it well for sustained growth, even in this challenging environment. The valuation appears attractive at only 11 times estimated 2005 earnings per share and sporting a secure 4% dividend yield. S&P also maintains a strong buy (5 STAR) recommendation on Bank of America in light of its recent success in integrating numerous acquisitions and its diverse business mix. S&P looks for the company's net interest margin to remain relatively stable ahead. Merrill Lynch Downgrades Fifth Third Dayton Business Journal 8-25 Fifth Third Bancorp Inc. stock dropped nearly 2 percent after Merrill Lynch & Co. downgraded the bank to "sell" from "neutral" on Thursday and said it "has been the worst performing large-cap regional bank stock over the past year." Analyst Edward Najarian wrote in a research note that Cincinnati-based Fifth Third's earnings may disappoint investors, its margins may shrink, acquisitions may be in its future, and it's still expensive relative to most other large-cap regional banks. Najarian estimates Fifth Third, the 11th-largest U.S. bank and the largest bank in the Dayton area, will earn $3.15 per share in 2006, 15 cents less than analysts' consensus and down 5 cents from a prior projection. He wrote that Fifth Third shares trade at 13.5 times expected 2006 earnings per share, or a 14% premium above its peers. Also, 28 percent of the bank's earning assets are composed of securities, despite restructuring of the balance sheet in Q4, and Fifth Third remains more dependent on nondeposit borrowing than its competitors, he said. Consequentially, Najarian said the bank's net interest margin, or the difference between what it makes on loans and pays on deposits, might contract as the gap between long- and short-term rates shrinks. The note added that another restructuring could be looming as the bank attempts to reposition its bond portfolio. Najarian also cited Fifth Third management's interest in moving into "growth" markets. He said the bank's recent purchase of First National Bankshares of Florida Inc. "indicates a willingness to pay premium acquisition prices." Fifth Third agreed to pay a nearly 41 percent premium for the acquisition. He also said Fifth Third is an unlikely candidate for acquisition by anyone else in the near future. Taking everything into account, Najarian said a stock value of $38, or about 11 percent less than the bank's current trading level, would be more in line with its reality. PNC Financial Bolstered By Higher Growth Rates Forbes 8-15 Standard & Poor's Equity Research reiterated a "buy" rating on PNC Financial Services and raised the target price to $63 from $58, based on valuation and dividends. "We believe that the company's previously announced cost-saving and revenue-enhancement initiatives will yield better results than we previously projected," S&P Equity Research said. For 2006, the research firm raised the earnings-per-share estimate on PNC to $4.91 from $4.78, "to reflect adjustments to our model that incorporate slightly higher growth rates than previously used." S&P Equity Research reiterated its 2005 earnings estimate on PNC of $4.47 per share, which includes a one-time tax benefit of 16 cents per share. August Ratings Changes On 8-25 Sandler O'Neill Upgraded STI from Hold to Buy, reversing the 7-20 Downgrade from Buy to Hold. On 8-11 Goldman Sachs Upgraded NFB from Underperform to In-Line. From David Weidner, MarketWatch 8-15: Merrill upgraded PNC to buy from neutral, citing increased confidence in its earnings estimates for 2006, strong earnings momentum in the second half of 2005 and 2006 and PNC being well positioned to benefit from the current interest-rate backdrop. In addition, the broker told clients it believes the market isn't fully grasping the EPS growth implications of PNC's recently unveiled "One PNC" efficiency improvement initiative. July Ratings Changes On 7-21 Advest Downgraded NFB from Buy to Neutral. On 7-21 Morgan Stanley Downgraded BK from Overweight to Equal-weight. On 7-21 CIBC Wrld Mkts Upgraded JPM from Sector Underperform to Sector Perform. On 7-20 RBC Capital Mkts Upgraded BK from Underperform to Sector Perform. On 7-18 Keefe Bruyette Downgraded RF from Outperform to Mkt Perform. On 7-18 CIBC Wrld Mkts Upgraded NCC from Sector Underperform to Sector Perform. On 7-18 Oppenheimer Downgraded NCC from Buy to Neutral. On 7-14 Oppenheimer Upgraded KEY from Sell to Neutral. On 7-14 Morgan Stanley Downgraded FITB from Equal-weight to Underweight. On 7-14 UBS Initiated NCC at Neutral. On 7-07 UBS Upgraded WB from Neutral to Buy. On 7-08 Sanders Morris Harris Upgraded WFC from Hold to Buy. According to Berkshire's most recent Form 13F-HR, filed with the SEC yesterday, Mr. Buffett's value-investing machine has snapped up 3.2 million shares of SunTrust Banks. (Rich Smith, Motley Fool 8-16) Monthly Mid-Cap Bank Sector Summary During August, mid-cap banks fell 2.74% to a year-to-date loss of 2.71% from June's year to date rise of 0.13% and yields ended at 3.44% [vs July's 3.32% - a rise of 12 basis points]. The ten year treasury ended the month at 4.02% [vs 4.28% on 7-29 - a rise of 26 basis points]. During July, mid-cap banks rose 4.13% to a year-to-date gain of 0.13% from June's loss of 3.78% and yields ended at 3.32% [vs June's 3.46% - a fall of 14 basis points]. The ten year treasury ended the month at 4.28% [vs 3.91% on 6-30 - a rise of 37 basis points]. During June, mid-cap banks rose to a year-to-date loss of 3.78% from May's loss of 5.98% and yields ended at 3.46% [vs May's 3.56% - a rise of 10 basis points]. The ten year treasury ended the month at 3.92% [vs 4.00% on 5-31 - a fall of 8 basis points]. ONB Reports $.31 EPS From Continuing Operations for Q2 - Up 10.7% Over Q1 Business Wire 7-28 Old National Bancorp announced second-quarter earnings from continuing operations of $21.2 million, or $.31 per share. These results represent a 10.7% increase in earnings per share from continuing operations over the $.28 per share earned in Q1-05. Net income, which includes income from discontinued operations, was $22.9 million for Q2, or $.33 per share, significantly ahead of the $18.5 million, or $.27 per share, earned in Q1-05 and the $11.3 million, or $.16 per share, earned in Q2-04. Old National took nonrecurring pre-tax charges of $25.1 million related to the ASCEND project during Q2-04. Based on Q2 net income, both return on average equity and return on average assets showed significant improvement over the first quarter. At June 30, 2005, return on average equity and return on average assets were 13.18% and 1.05%, respectively. This compares to 10.48% and .84% at March 31, 2005, and represents the highest returns in any quarter since the second quarter of 2003. ONB's investment in enhanced credit administration and work-out programs continues to result in improved credit quality. Non-performing loans at June 30, 2005, were $49.0 million, down $6.2 million from the $55.2 million at March 31, 2005, and a decrease of $48.6 million from second-quarter 2004 levels. The total portfolio of loans identified by the company as problem credits also continues to decline. Total classified and criticized loans at June 30, 2005, were $264.8 million, down $46.8 million, or 15.0%, from $311.6 million at March 31, 2005. For Q2-05, net interest income was $62.7 million, down $1.5 million from the first quarter of this year. For the first half of 2005, net interest income was $126.9 million, a $15.5 million reduction from the same period of 2004. The year-over-year decline is mainly attributable to the sale of $405.6 million in residential mortgage loans at the end of Q2-04. The net interest margin was 3.20% for Q2, a slight decline from the 3.22% for Q1-05. For the first six months of the year, the margin was 3.21% compared to 3.37% during the first half of last year. Total fees and service charge revenues during Q2-05 were $37.2 million, a $.9 million increase over Q1-05. This increase was primarily due to seasonally higher levels of revenue from fees and service charges on deposit accounts. Old National's initiative in the capital markets sector, including the sales of interest-rate risk management products, bond financing, and foreign exchange, has helped offset the effects from the industry-wide decline in service charge income. Income derived from the sale of capital markets products for the first half of 2005 was $1.5 million, compared to the $.4 million earned during the entire year of 2004. Susquehanna Announces Flat Q2 Results Business Wire 7-26 Susquehanna Bancshares today announced net income for the second quarter of 2005 was $18.7 million, or $0.40 per diluted share, compared to the $16.5 million, or $0.40 per diluted share, for the second quarter of 2004. compared to 3.52% in Q2-04 nad improved 10 basis points from 3.71% in Q1-05. Return on average assets and average equity for the second quarter of 2005 finished at 1.03% and 10.01%, respectively. This compared to the second quarter of 2004 with 1.04% and 11.28%, for the same measurements, respectively. Return on average assets and average equity for the first six months of 2005 were .93% and 9.19%, respectively. This compared to 1.06% and 11.45% for the first six months of 2004. Susquehanna has been recognized as a Mergent Dividend Achiever for the sixth consecutive year. AmSouth Says SEC Considers Civil Suit AP 8-24 AmSouth Bancorp on Wednesday said the SEC might pursue civil action against its banking and asset management units for possible violations within its mutual fund business. The Southeastern regional banking giant said it received a "Wells Notice" from the regulator in connection with its AmSouth Bank and AmSouth Asset Management Inc. businesses. The potential action arose from the SEC's investigation of the mutual fund services unit of New York-based Bisys Group Inc., which provides administrative support functions for financial services companies. AmSouth said it has been "cooperating extensively" with the SEC's Bisys investigation. The company believes the SEC's investigation relates to past arrangements under which Bisys used a portion of the fees paid to it by AmSouth Funds to pay for marketing and other expenses. The company said it will cooperate with the SEC, and has launched its own internal probe of the matter. AmSouth previously announced the sale of its mutual fund unit to Pioneer Investment Management Inc. The company said that transaction is "proceeding toward completion" in September. A Wells Notice indicates that the SEC's staff has made a preliminary decision to recommend that the Commission authorize the staff to bring a civil action. However, the notice is not a formal allegation or proof of wrongdoing. BancorpSouth Expands in Arkansas With Acquisition of American State Bank PRNewswire 8-10 Officials of Tupelo, Mississippi based BancorpSouth and American State Bank Corporation of Jonesboro, Arkansas announced today the signing of a definitive merger agreement pursuant to which American State Bank Corporation will merge with and into BancorpSouth. The merger will expand BancorpSouth's Arkansas presence into four northeast Arkansas counties while adding eleven additional branches. BancorpSouth currently operates 48 banking locations in 24 Arkansas cities and communities with approximately $1.7 billion in deposits. Capital One, Hibernia to Delay Transaction Reuters 8-31 Capital One and Hibernia said on Wednesday they had both agreed to reschedule the closing of their scheduled merger because of Hurricane Katrina. Capital One's cash-and-stock acquisition of New Orleans-based Hibernia was scheduled to close on Thursday. August Ratings Changes On 8-26 Sun Trust Rbsn Humphrey Initiated coverage of SUSQ at Neutral. On 8-26 Sun Trust Rbsn Humphrey Initiated coverage of FULT at Buy. On 8-22 AG Edwards Upgraded TCB from Hold to Buy. On 8-18 JP Morgan Initiated coverage of SUSQ at Underweight. On 8-17 Prudential Initiated coverage of WL at Neutral. On 8-16 Advest Initiated coverage of FULT at Buy. From Lisa Sanders, MarketWatch 8-25: Shares in AmSouth fell 24 cents to $26.09 Thursday after Punk Ziegel downgraded the stock to market perform from buy. The SEC issued a Wells notice, which is non-public, to AmSouth, informing the bank that the agency may bring action against it for alleged violations of federal securities laws. The potential violations relate to the company's mutual fund business. "This puts the bank in a position where outsiders simply have no idea what is happening internally," said Dick Bove, an analyst at Punk Ziegel, in a note to clients. "The risk has become greater than the reward in this situation." July & June Ratings Changes On 7-28 Hillard Lyons Downgraded FMER from Long-term Buy to Neutral. On 7-22 Keefe Bruyette Upgraded HU from Mkt Perform to Outperform. On 7-13 Ryan, Beck Downgraded HU from Mkt Perform to Underperform. On 7-21 Smith Barney Citigroup Downgraded CMA from Hold to Sell. On 6-02 CIBC Wrld Mkts initiated coverage of ASO at Sector Underperform. On 6-30 JP Morgan initiated FHN at Neutral. On 6-22 Advest initiated HU at Neutral. On 6-09 Keefe Bruyette downgraded SKYF from Market Perform to Underperform. On 6-23 Moors & Cabot initiated coverage of TCB at Buy. On 6-30 JP Morgan initiated TCB at Underweight. NOTE: Please confirm through your own research any numbers on which you are to make a buy, sell or hold decision. The page is ment to be a supliment for those already getting monthly sector updates from their broker. It is the goal of this page to provide more timely data - and perhaps cover a wider array of stocks and different valuation metrics. Data entry errors sporadically happen. Home Page Factoids Previous Update |