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Fed Rate Pause May Not Help Banks David Enrich, WSJ 8-09-06 The Federal Reserve's decision to stop raising interest rates might not be the balm for banks that some investors imagine. Banks' most basic business is borrowing at low short-term rates and lending at higher long-term rates. By marching up short-term interest rates for the past two years, the Fed has narrowed the gap between those rates, squeezing banks' profits. Thus, the conventional wisdom that a "pause" in the central-bank's rate-raising cycle is just what the doctor ordered to expand margins. Indeed, the stocks of publicly traded banking companies have outpaced the broader market since June 29, the date of the Fed's prior policy meeting, at which the central bank hinted it may be done pushing up rates for a while. But the conventional wisdom often oversimplifies: Some banks' profits won't improve much if rates hold around current levels. And margins for some small and midsize banks initially could even end up in worse shape. For one thing, rising interest rates weren't equally bad for all banks. They benefited from the higher yields they had been collecting on assets ranging from real-estate loans to debt securities. Rates on those investments will now likely stop rising. At the same time, banks are likely to keep shelling out more money for deposits because of stiff competition for new customers and the fact that banks have lagged behind the Fed in raising their deposit rates. Net result: Some banks will end up paying out higher rates even as the rates they are earning stay the same. That will effectively squeeze their margins in much the same way the Fed's rate campaign did. "Deposit-pricing competition will remain intense, and asset yields will not reprice upward once the Fed pauses," Merrill Lynch analyst Heather Wolf wrote in a recent note, adding that a "Fed-is-done" trade into bank stocks would be "misguided." Conventional Wisdom Oversimplifies Relationship Between Margins, Interest Bank executives have been trying to limit investors' expectations for short-term benefits to the end of a rate-raising cycle. They have been pointing out that their margins won't improve unless the gap between short- and long-term rates widens, as opposed to simply stops getting narrower. For margins to expand, the "next step would be the Fed changing direction, not pausing," Alvaro de Molina, Bank of America's chief financial officer, said during a conference call last month. A rate pause could be especially tough on banks whose assets reprice faster than their liabilities, which include the payments they must make on deposits. Such asset-sensitive banks tend to have balance sheets weighted toward variable-rate commercial loans and mortgages. Those banks, including Regions Financial, Synovus and Colonial Bancgroup, actually have benefited from the high-rate environment. If the Fed stops raising rates, "asset-sensitive banks are no longer going to have that advantage," said Kevin Fitzsimmons, of Sandler O'Neill. "The reality may be that, next year, investors may be surprised to see their margins still coming in." Some bankers acknowledged as much. "Some amount of deposit lag will come out, placing pressure on that margin," said D. Bryan Jordan, CFO of Regions. Conversely, if rates were to keep rising, "that should benefit the margin," he said. Still, a pause in Fed rate increases is good news for the overall banking business, argued Michael Holton, a portfolio manager and bank analyst at T. Rowe Price, because it portends rate cuts down the road and a slowing economy that could also make the stocks of healthy banks look like safe ports for investors. June-July Ratings Changes On 7-28 AG Edwards Downgraded PNC from Buy to Hold. On 6-16 Brean Murray Initiated coverage of WFC at Strong Buy, Brean Murray Initiated coverage of WB at Strong Buy, and Brean Murray Initiated coverage of BAC at Strong Buy. Louisiana & Mississippi Banks are Doing Well V Bauerlein & S Chen, WSJ 8-03-06 Banks in hurricane-ravaged Louisiana and Mississippi are proving to be surprisingly immune to the worries that are hurting regional-bank stocks throughout the rest of the U.S. The share price of Whitney Holding, which is based in New Orleans and holds 16% of all deposits in that city's metropolitan area, has surged 31% so far this year. Hancock Holding is up 38%, while BancorpSouth has gained 24%. In contrast, the Keefe, Bruyette & Woods index of 50 regional banks is up 1.1% and the Dow Jones Wilshire Bank Index of about 500 banks has risen 6.9%. To be sure, Gulf Coast banks with exposure to areas devastated by hurricanes Katrina and Rita still are in recovery mode, with some squeezing loan payments from cash-strapped borrowers and operating from temporary branches in trailers. But doomsday predictions of massive loan write-offs and depleted checking and savings accounts haven't come true. Insurance checks are flowing in, a big boost in government aid is expected by year's end and loan quality has been so solid that several banks are reducing special loan-loss reserves created to help them weather the financial aftermath of Katrina. In the latest quarter, Whitney set aside a modest $1 million loan-loss provision -- or 33% less than it did in last year's second quarter. Capital One Financial, which acquired New Orleans-based Hibernia in November and set aside $175 million for Katrina-related loan losses, has had just about $30 million in write-offs so far. Gary Perlin, Capital One's CFO, told analysts last month that he expects losses to "roll through" slowly over the next two years. Hibernia ranks No. 1 in deposits in the New Orleans area, with a 29% market share, according to the latest federal data. Second-quarter profit at six of the largest banks by deposit share in New Orleans and three coastal Mississippi counties rose by double-digit percentages, including jumps of 34% at Whitney and 38% at BancorpSouth, fueled at least partly by the influx of insurance and government checks. After Katrina hit, investors dumped shares of banks in wrecked areas, and Whitney's stock price sank 24% in six weeks. Chris Marinac, a bank analyst at FIG Partners LLC in Atlanta, says he feared that Katrina was "the big one" that would defy history that shows hurricanes eventually aren't bad for banks because they benefit from rebuilding and economic development. While the recent stock-price gains by Gulf Coast banks have made them relatively expensive, Mr. Marinac says some still have room to climb further, led by IberiaBank Corp. The Lafayette, La., bank served no areas slammed by Katrina or Rita but has recently opened six new branches in the suburbs of New Orleans and Baton Rouge to capture posthurricane spending. Iberia plans to open six additional branches around New Orleans. Mr. Marinac rates Iberia a "buy." Neither he nor his firm owns any Iberia shares. Cory Shipman, an analyst at Stanford Group, a Memphis brokerage firm, says Hancock should benefit disproportionately as the market leader along Mississippi's Gulf Coast. "It's the opportunity that still lies ahead," Mr. Shipman says, projecting that Hancock's assets will swell by 50% through next year. Net income is expected to climb 14% to 15% a year over the next five years. Mr. Shipman, whose firm trades Hancock shares, rates the stock a "buy." Analysts disagree on Whitney, with four rating the shares a "buy" and five a "hold," according to Thomson Financial. Businesses and residents have been slow to rebuild in part because of uncertainty about which neighborhoods will be designated safe from flooding by federal officials. Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP in New York, who has a "hold" rating on Whitney, said it is hard to tell how long it might take for Whitney to generate significant loan growth. Sandler O'Neill does business with the bank and trades its shares. Still, Bain Slack, a Keefe Bruyette analyst, likes Whitney because he says it is the best-positioned bank to participate in the city's resurgence and also is expanding in growing markets such as Houston and Tampa. Mr. Slack rates Whitney a "buy," and his company does business with the bank. Hancock's 15-story headquarters remains closed for renovation after Katrina blew out the windows facing the Gulf of Mexico and destroyed much of the roof, and analyst Gary Tenner at SunTrust Robinson Humphrey Capital Markets in Atlanta says the arrival of this year's hurricane season is making some investors leery again. But bank officials say they will be ready for the next hurricane, partly because some banks have moved data-storage sites inland and created new backup locations. "We still have our customers, the people we helped through this crisis," says Guy Williams, chief executive of Gulf Coast Bank & Trust, a small New Orleans bank with 11 branches. "And they won't forget us." August Ratings Changes On 8-10 Stifel Nicolaus Initiated coverage of ONB at Hold. On 8-14 Rochdale Securities Downgraded NCC from Hold to Sell. On 8-17 Prudential Initiated coverage of WL at Neutral. On 8-17 Goldman Sachs Downgraded CMA from Neutral to Sell. On 8-18 AG Edwards Downgraded KEY from Hold to Sell. On 8-21 Credit Suisse Downgraded STT from Outperform to Neutral. On 8-24 Friedman Billings Downgraded TCB from Outperform to Market Perform. On 8-17 FirstMerit declared a quarterly cash dividend of $0.29 per share on the Corporation's Common Stock, up $0.01 from the current quarterly dividend of $0.28 per common share, payable September 18, 2006, to shareholders of record on August 28, 2006. On 8-29 Friedman Billings downgraded First Horizon [FHN] to underperform from market perform, after FHN said Tuesday that it expects mortgage banking earnings to be unfavorably impacted this quarter by two unrelated events. The further deterioration in the current mortgage environment is expected to reduce the company's pre-tax operating earnings by approximately $35 million as compared to the second quarter. The settlement of a class action lawsuit is anticipated to create an estimated $21 million pre-tax accrual. Analyst Gary Townsend cuts his $3.20 2006 EPS estimate to $2.80 and his $3.55 2007 EPS estimate to $3.00. Shares trade at 14.3 times and 13.4 times the analyst's revised 2006 and 2007 EPS estimates, at an unwarranted premium to the group. Home Page Factoids Previous Update |