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New Minimum Payment Requirements Seen Hurting Bank Profits Joe Bel Bruno, AP 3-10 Making the minimum payment on your credit card bill might not be as easy as it used to be -- and two of the nation's largest banks say their own finances might suffer as a result. Both Citigroup and JPMorgan Chase said in recent filings with the SEC that delinquencies and charge-offs might spike in the second half of the year. That's when the banks believe new federal guidelines that require significantly increased monthly minimum payments will begin to hurt customers already struggling to pay bills. "Banks will not only have increased losses, but reduced revenue as well," said Lehman Brothers analyst Jason Goldberg. "For some customers, the banks will have to reduce interest payments in order to keep them from defaulting. There's a bit of uncertainty because its hard to predict human behavior." The new guidelines require credit card issuers to charge an amount that includes not just the outstanding fees and finance charges, but at least 1 percent of the principal owed. This could cost JPMorgan and Citigroup each about $500 million of losses and lost revenue this year, Goldberg said. Banks have instituted the new minimum balances at a time when American families continue to reel from credit card debt. The Federal Reserve said last month in its survey of consumer finances that 46.2 percent of all families now carry a credit card balance -- up from 44.4 percent in 2001. Meanwhile, consumers are also carrying higher balances -- with the mean balance growing to $5,100 from $4,400 in 2001, according to the report. The median income is currently $43,200 and the typical family's credit card balance is now almost 5 percent of their annual income, according the Fed said. Capital One to Acquire North Fork PRNewswire 3-12 Capital One Financial Corporation and North Fork Bancorporation announced a definitive agreement under which Capital One will acquire North Fork in a stock and cash transaction valued at approximately $14.6 billion. The combined company will be one of the 10 largest banks in the United States, based on deposits and managed loans, and the third-largest retail depository institution in the New York region, the nation's largest deposit market. Under the agreement, North Fork shareholders will receive cash or stock valued as of Friday, March 10, 2006 at $31.18 per North Fork share, which represents a 22.8% premium over the closing price of North Fork shares. Bank of New York Rises on Report That JPMorgan May Buy Its 300 Branches AP 3-30 Bank of New York shares rose more than 4 percent in trading on Thursday after a report that JPMorgan Chase & Co. was looking to buy its 300 branches in a deal valued at about $4 billion. There have been reports for weeks that the Bank of New York was looking to sell its branch network in the New York metropolitan area. The New York-based bank is among the nation's largest trust banks and makes the bulk of its money in securities processing, treasury management and investment management. In a research note earlier this month, Prudential Equity Group analyst Michael L. Mayo said there was "an increased chance" the Bank of New York would spin off its retail banking operations. He said the bank's operations "lagged peers over the past three years" in deposit gathering as it focused on its processing business. He valued the retail operations at about $4 billion. February Ratings Changes On 2-24 JP Morgan downgraded NFB from Overweight to Neutral. Why Don't Banks Fail Anymore? Daniel Gross, Slate 3-27 Yesterday marked the 639th day without a bank failure, the longest run in the FDIC's history. The prior record, 609 days, ended in 1946. And 2005 was the first calendar year since the FDIC's inception, in 1934, in which no banks failed. Are these signs that the vast banking industry has reached a new plateau of permanent prosperity and competency? Or is it the calm before the storm? The FDIC was one of those awful, socialistic, anti-capitalistic, doomed-for-failure New Deal projects that has, in fact, contributed enormously to the nation's well-being. "No depositor has lost a single cent of FDIC-insured funds as a result of a failure," as the FDIC proudly notes. And it certainly hasn't inhibited the banking industry from growing. U.S. banks endured the wretched period between 1980 and 1993, in which 2,500 banks and savings institutions were swept away. FDIC Chief Economist Richard Brown says 1980-93 was "a 100-year flood" for banking. Deregulation in the '70s and '80s led to massive industry expansion without a concomitant rise in risk-management capabilities. And rolling regional problems—woes in the farm belt and New England, manufacturing recessions in the Midwest, real estate speculation on the coasts, and the savings and loan crisis in the Sun Belt—produced gigantic failures. The wave peaked in 1991, when 124 banks with $53.75 billion in assets failed. Brown notes that the failure rate had less to do with the national business cycle than with poor decision-making, incompetence, local problems, and fraud. But the industry learned its lessons. The combination of government oversight, competitive pressures, and improved risk-management has massively reduced the chances of large-scale bank failures. Since 1997, only 36 banks with combined assets of about $5.15 billion have failed. What's happened in the last decade? Banks have gotten larger and more sophisticated at managing risk. Today about 92% of the nation's banks score sufficiently high on measures of capital and supervisory risk that they don't have to pay any FDIC insurance premiums at all. The process of securitization allows banks to distribute risks from local loans to financial institutions around the world. In addition, many weak banks are acquired today before they have the opportunity to fail. Perhaps most important, the economic environment of the last decade—healthy economic growth, low interest rates, and low inflation — has been nirvana for bankers. Back in the early 1980s, with inflation rampant, savings and loans were stuck holding 30-year mortgages that yielded only 7% while they had to pay double-digit interest rates on short-term deposits. "Under the recent economic conditions, it's been difficult to fail," said Brown. Indeed, it's possible that the estimated $3.9 trillion in insured deposits at U.S. banks have never been safer. And so the decision to boost the cap on insured deposits seems unobjectionable. The Federal Deposit Insurance Reform Act raised the roof on insured deposits in retirement accounts from $100,000 to $250,000. The cap on insured deposits in nonretirement accounts remains at $100,000, although the cap could be adjusted for inflation starting in 2011. And yet. Observers of financial meltdowns have long noted that things seem calmest and most risk-free just before disaster. The last time the insurance cap was raised in 1980, from $40,000 to $100,000 - it helped set off the S&L boom, and subsequent bust, which wound up costing taxpayers hundreds of billions of dollars. And there are some clouds on the banking horizon. While loan delinquencies are very low by historical standards, the FDIC's notes that small banks are very active in commercial real estate and commercial lending. Construction and development lending last year rose 33% for FDIC-insured institutions, the fastest since 1986. Also, some failures in recent years stemmed from problems in subprime loans. Now - in a situation where interest rates are trending upward, the housing market is rolling over, and subprime borrowers are generally under financial stress - that may add up to some problems. Future of Regional Banks Looks Tough Robin Sidel, WSJ 3-14 John Kanas, one of the banking industry's most outspoken executives, has sounded the alarm that times are likely to stay tough for the nation's regional banks. But while Mr. Kanas, chief executive of North Fork Bancorp, has found the answer to his problems in Capital One Financial, many of his regional-banking brethren mightn't be so lucky. Shares of North Fork jumped 15% to $29.20 yesterday in reaction to the New York bank's $14.6 billion planned takeover by Capital One. The move sent North Fork's stock price near its 52-week high of $29.98. As part of the deal, Capital One -- known lately for its "What's in your wallet?" ad campaign -- will for the first time plaster its name on retail banking branches in New York, New Jersey and Connecticut. It is the second large, recent acquisition for the big credit-card issuer, which late last year entered the traditional banking business by acquiring New Orleans-based Hibernia Corp. "North Fork provides us with a proven franchise and a strong growth platform in the largest banking market in America," Richard Fairbank, Capital One's chief executive, said in a statement announcing the deal. Despite Capital One's optimism, this year isn't expected to be a great one for the nation's financial institutions. Banks are raising interest rates to attract deposits and offering aggressive loan terms for consumers and corporate customers. Furthermore, credit quality is widely expected to soon start deteriorating from the unusually strong levels of late. At the same time, profits are being squeezed by the narrowing gap between long- and short-term interest rates, known as the yield curve. Banks, which borrow at cheaper short-term rates and lend money at higher long-term rates, typically profit on the spread between the two. Indeed, Mr. Kanas, a 35-year veteran of the banking business, cited the flatter yield curve as one of the key reasons that North Fork decided to sell itself to Capital One. All of these issues are hitting regional banks particularly hard. Unlike larger diversified banks such as Citigroup Inc. and J.P. Morgan Chase, the regional players typically aren't in other businesses that generate sizable profits, such as providing merger advice. "We don't see a compelling reason to get overly excited about regional banks right now," says Steve Scruggs, a portfolio manager at Bragg Financial Advisors Inc. in Charlotte, N.C., which owns stocks in large regional players like National City Corp. in Cleveland and Fifth Third Bancorp in Cincinnati. Despite those views, regional banks are still valued highly in the stock market, in part due to speculation that big banks will swoop in to buy them. Shares of the 50 banks in the KBW Regional Bank Index have risen 23% since January 2004 compared with a 10% rise in KBW's large-bank index. As for this year, the regional banks are up 1.7% compared with a 2.2% rise among the large bank stocks. "There is still some takeover premium built into these prices and the CEOs and shareholders still will want more than that" in any takeover, said Jacqueline Reeves, a regional-banking analyst at Ryan Beck & Co. Ms. Reeves has a "market perform" rating on North Fork. Ryan Beck, which makes a market in North Fork's shares, doesn't have a stake in the bank. Like North Fork, some regional banks with strong positions in growing regions might still be attractive to prospective buyers. Among them: New Jersey-based Commerce Bancorp Inc., which is expanding in New York, Florida and Pennsylvania. Shares of Commerce were up 2.8% to $35.75 -- near a 52-week high of $35.98 -- in trading on the Big Board. But even if the target is attractive, bank buyers may run into problems justifying such deals to their investors. Yesterday, shares of Capital One tumbled more than 7% to $83.10 on the NYSE. Analysts attributed the steep drop to Capital One's acknowledgment that the North Fork acquisition would dilute its earnings by 6.5% next year. "Most banks would find that unacceptable. It's too high," said Gerard Cassidy, an analyst with RBC Capital Markets. Mr. Cassidy has a "sector perform" rating on North Fork's stock. He doesn't own any shares. Instead of big deals, some investors and analysts think that regional banks are more likely to join forces in transactions that don't provide premiums to shareholders of either bank. Those deals, often touted as "mergers-of-equals," would allow the banks to temporarily lift profits by cutting jobs and assorted costs that are associated with combining two companies. "We know the yield curve will steepen at some point, but for now, it's not a pretty picture," said Mr. Scruggs, the portfolio manager. One big bank that is likely happy with the Capital One-North Fork deal is J.P. Morgan. In addition to advising Capital One on the deal, the big New York bank also is the largest shareholder of North Fork, owning 19.7 million shares, or 4.14% of North Fork's outstanding shares as of Dec. 31, 2005. A J.P. Morgan spokeswoman said the shares are owned by the bank's asset-management division on behalf of its investment clients. March Ratings Changes On 3-01 Keefe Bruyette Downgraded ASBC from Outperform to Market Perform. On 3-06 Bear Stearns Initiated coverage of UB at Peer Perfrom. On 3-09 Bear Stearns Initiated coverage of UB at Peer Perform. On 3-28 Harris Nesbitt Initiated coverage of CYN at Outperform. On 3-31 UBS downgraded HBAN to Neutral from Buy, citing its reduced confidence in HBAN's earnings outlook and valuation. On 3-02 Standasd and Poor's analyst: Richard Tortoriello upgraded FHN to 4 STARS (buy) from 3 STARS (hold). First Horizon National announces it will buy back 4 million shares of its common stock through an accelerated share repurchase program. The buyback represents about 3% of First Horizon National shares outstanding. As a result, we are increasing our 2006 EPS estimate by 8 cents to $3.63. We expect some rise in long-term interest rates in 2006, which we believe will aid First Horizon National's interest margin, and we see improved results in the capital markets division. Our 12-month target price rises to $45 from $40, 12.5 times our 2006 EPS estimate, below the current peer average of 15 times. February Ratings Changes On 2-10 Sun Trust Rbsn Humphrey Upgraded SNV from Neutral to Buy. On 2-10 Oppenheimer Upgraded TCB from Neutral to Buy. 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 |