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S&P puts 5 Largest U.S. Banks on Watch Positive Nick Godt, MarketWatch 11-01 Standard & Poor's on Wednesday put the credit rating of five of the largest banks in the U.S. on CreditWatch with positive implications, saying that high profitability, diversification and improvements in risk-management should shield them from cyclical downturns. The move means S&P believes it likely its next action will be to raise the credit ratings on the banks. The five banks are Citigroup, Bank of America, JP Morgan Chase, U.S. Bancorp, Wells Fargo and Wachovia is already on CreditWatch positive. "The CreditWatch placement reflects our view that the U.S. banking industry has become sounder on a variety of fronts over the years, so that the potential for higher ratings, including the 'AAA' level, now exists," S&P said. "While we expect some general deterioration in bank earnings in the coming year, we would be comfortable with moderate declines even at higher rating levels," it said. The rating agencies have so far shown confidence that in spite of the fast-falling housing market and rising risks of default on mortgage payments, big banks remain shielded from credit risk. In the late 1980s-early 1990s, most banks were diversified enough to weather a recession-induced housing downturn. Most banks have passed on a lot of risk to the credit markets, having sold most risky mortgages as mortgage-backed securities (MBSs). However, many banks turn around and also buy MBSs, along with complex instruments to hedge their bets. These securities have not seen any major downgrades in their credit ratings either, though some credit ratings analysts have confessed they do not have much empirical data for the new exotic types of mortgages that have been sold to homeowners who didn't qualify under previously stricter lending standards. Relief for bank margins could come if the Fed cuts interest rates to stave off an economic slowdown, and if long-term market rates start rising to reflect those expectations. "How management teams optimize their banks' balance sheets as consensus expectations shift to a soft economic landing scenario next year remains the most critical issue," that could influence whether S&P lifts its ratings on some banks in the near future, the report said. But looking farther into 2007, credit quality will remain the key determinant, it said. "Historically, margin shrinkage has been a manageable pain with which banks deal on a regular basis," S&P said. "Credit explosions, on the other hand, have dealt the death blow to some financial institutions in the past." Merrill Turns Cautious on Banks Nick Godt, MarketWatch 11-03 While the market has been favoring banks on expectations that the industry would benefit once the Federal Reserve cuts interest rates, investors should de-emphasize bank stocks within their financial holdings amid deteriorating fundamentals, Merrill Lynch analyst Brian Belski wrote in a note Friday. "This is not a call to sell bank stocks," he wrote, recommending instead stock picking within the banks while continuing to favor asset managers, brokerages, and select insurance companies within the financial sector. "While a more cautionary stance on the industry is admittedly counterintuitive given the forecast for lower interest rates in 2007, we believe a prudent approach is common sense given the recent price performance and potential decelerating fundamental landscape," Belski wrote. While the Fed lifted short-term rates through the first half of 2006, long-term rates have remained mostly flat and actually fell in the third quarter, creating a so-called inverted yield curve -- and pressuring banks' margins. Banks make money by borrowing at what are normally cheaper short-term interest rates to lend at normally richer long-term rates, with the profit making up their net interest margin. But relief for bank margins could come if the Fed cuts interest rates to stave off an economic slowdown, and if long-term market rates start rising to reflect those expectations. But Belski noted that while the market is betting on this positive factor, it has ignored negative fundamentals -- a slowing housing market and economy -- which are leading to decelerating earnings growth and deteriorating credit quality. "Third-quarter earnings reports from many bank stocks have given us reason to be concerned," he wrote. "For instance, while a majority of financial stocks are still beating estimates, the sector is currently displaying the highest percentage of companies that have missed consensus earnings expectations within the S&P 500 Index." Washington Mutual and North Fork were among the big banks whose earnings missed forecasts this quarter, while Citigroup was among those missing revenue forecasts. Bear Stearns Says Some Banks Bet Fed Will Cut Rates in 2007 AP 11-20 Many banks are betting the Federal Reserve will cut short-term interest rate targets in 2007, according to a Bear Stearns report issued Monday. Bear Stearns analyst David Hilder said Washington Mutual, PNC Financial Services Group and State Street in particular have tinkered with their balance sheets and asset mixes to benefit from lower interest rates. To a lesser extent, JP Morgan Chase, National City Corp., and Wachovia positioned themselves to benefit from lower rates, Hilder said. But not all banks foresee lower rates. Mellon Financial's balance sheet makeup means it would suffer if rates fall, and a handful of banks including Bank of America and Citigroup are positioned to benefit less from lower rates now than they were at the end of the second quarter. Bank of New York would benefit the most if rates rose. Hilder based his report on banks' analyses of interest-rate scenarios in annual and quarterly reports. Concerns Rising Over Quality of WFC's Loan Portfolios San Francisco Business Times 11-24 Wall Street analysts, and bankers themselves, are raising concerns about the health of bank loan portfolios as they assess what lies ahead for the industry. Richmond-based Mechanics Bank CEO Steve Buster told the San Francisco Business Times that he's concerned about the headwinds his industry will face in the next few years in terms of loan repayments. The East Bay banker says the competition for loans has prompted some banks to compete on price while others are loosening lending criteria that could make these loans more vulnerable to an economic downturn or company-specific reversals. Buster's assessment is echoed in part by a report issued this week by Dick Bove, an analyst with Punk, Ziegel & Co. Bove says Wall Street could be harboring concerns about Wells Fargo & Co.'s exposure to loans made to people with tarnished credit histories. "What may have caused concern is Wells positioning in the subprime markets," Bove said. The San Francisco bank recently told analysts that two-thirds of its subprime loans in its portfolio are held by borrowers with FICO scores of more than 620. That implies that a third have scores below 620. Bove says that it appears 25 percent of the bank's equity is offset by loans with lower than a 620 FICO score. "The importance of these loans to the bank was further highlighted by a slide in the Wells Fargo deck which showed that this bank had the highest net interest margins in its peer group," Bove said. In the third quarter, Wells Fargo's net interest margin was 4.79%, which was 123 basis points higher than U.S. Bancorp's and 206 basis points higher than Bank of America's. Wells Fargo CEO Dick Kovacevich often points to the bank's diversified mix of businesses, which includes a great deal of small business lending, as one of the bank's key competitive advantages. But Bove says the bank's cultivation of subprime borrowers may be the main reason for the bank's strong track record of growth. Wells Fargo sees the situation differently. "We're definitely delivering on our strategic model to be a diversified financial services business and one-stop shop for our all of our customers' financial needs," Wells Fargo spokesman Chris Hammond said. "Over time, Wells Fargo has experienced consistent and robust growth in a number of our businesses." Bove, in his report, points out that the rating agencies don't appear to be concerned about Wells Fargo's subprime lending. Moody's gives a portion of Wells debt the top rating of triple-A and Standard & Poor's has put the bank on credit watch for a possible upgrade to AAA status. "At the moment, we are in agreement with the rating agencies that this is a superior company," Bove said. "However, the loan-loss issue must be watched closely." October Ratings Changes On 10-20 Prudential Equity Group downgraded shares of BBT to underweight from neutral and lowered the company to $40 from $44 a share. "The company is more plain vanilla than some of its more diversified peers and therefore gets hurt from the continued flat yield curve, which is likely to contribute to still lower margin," Prudential analysts Michael Mayo and Hunter Murchison said in a note to clients. "We would rather invest in companies that benefit more from a higher stock market and better capital markets, notwithstanding our long-term favorable view of BB&T's CEO." Dividend Announcements by CBSS and SKYF On 11-21 Sky Financial Group announced that its fourth quarter dividend will be $.25 per share on its common stock, payable January 2, 2007, to shareholders of record as of December 15, 2006. The fourth quarter cash dividend represents a $.02 or 8.7% increase over the company's third quarter cash dividend. On 11-20 Compass Bancshares announced that its fourth quarter dividend will be $0.39/share, payable on January 2, 2007, to shareholders of record as of the close of business on December 15, 2006. Over the past 10 years, Compass earnings per share and annual dividend per share have grown at an annual compound rate of 11 percent. Compass holds Mergent's "Dividend Achiever" designation for increasing dividends for at least 10 consecutive years. New Banks Sprouting in California E. Scott Reckard, LA Times 11-19-06 When Ash Patel worked for Bank of Orange County in the 1990s, he was besieged with loan requests from owners of small hotels who shared his last name. "I was the only Patel that was a banker," he said. And so a niche was born: loans to motel-owning families named Patel with roots in the state of Gujarat in India. Patel is now president of Premier Commercial Bank in Anaheim, but he retains his roster of hotel clients. That specialized focus, he said, helped his small bank establish a foothold against a crowded field of competitors. To the casual observer, the California banking scene may seem like a gallery of ghosts. Old-line institutions such as Crocker National, Security Pacific and First Interstate disappeared years ago. Mighty Bank of America was uprooted from San Francisco in a 1998 takeover and moved cross-country to Charlotte, N.C. Although many of the big names have fallen, scores of smaller banks have quietly risen. Instead of trying to handle every financial need, the start-ups often carve out specialties to serve small-business owners or professionals. And their recent profitability - no California commercial bank founded from 1988 on has failed, according to the FDIC - has attracted flocks of investors. New institutions are being formed so fast that the number of banks in California rose to 274 last year from 253 in 2004, marking the first increase since 1990, said Edward Carpenter, whose Irvine-based investment bank produces an annual report on the state's banking industry with the California Bankers Assn. Nationally, the number of community banks also has edged up after two decades of decline. The total of FDIC-insured banks and thrifts with less than $1 billion each in assets bottomed out in 2004 at 7,186, then rose to 7,337 at last count, the agency says. In California, the small-bank boom is being abetted by the state's vibrant ethnic communities. Institutions such as East West Bancorp, Cathay General Bancorp, Hanmi Financial and Nara Bancorp began in L.A..'s Chinatown and Koreatown and became multibillion-dollar institutions. Their success has bred imitators: More than 20 Asian American banks are now based in Southern California, including two formed last year to serve Orange County's large Vietnamese community. A planned bank in Long Beach would be the first in the U.S. to focus on Cambodian immigrants, and banks targeting Latino businesses opened last week in Glendale and downtown Los Angeles. California's diverse and entrepreneurial population of 37 million provides opportunity for founders of new institutions, who are often bank executives left jobless after takeovers. "More and more CEOs are selling their banks and then returning to the fray by starting a new one," Carpenter's latest report said. Their e-mail address books and Rolodexes brim with former clients, potential investors as well as customers. With big banks dominating mass-market products such as mortgages, auto loans and credit cards, the start-ups often have concentrated on commercial real estate lending and construction, said Robert DeYoung, an economist for the FDIC. In real estate, local banks often have an edge because of their knowledge of office, industrial and apartment markets and business owners in the community. That's the niche that Premier Commercial has focused on since it was founded five years ago when Patel's previous employer, Bank of Orange County, was in management turmoil. Patel, 45, describes himself as "the quintessential Indian entrepreneur young upstart." To start the bank, he partnered with Kenneth Cosgrove, whom Patel calls "the quintessential mainline American banker." Cosgrove, 59, had built up Orange National Bank for 19 years before it was sold in 1999, and he had a wide range of former small-business customers that he called on to help start the new bank and become its customers. In 2001, Patel and Cosgrove mailed prospectuses to potential investors the weekend before the 9/11 terrorist attacks. Despite the ensuing economic shock, they managed to raise $7.3 million, topping the $6 million that they needed to get started. Premier Commercial's one full-service branch is on the bottom floor of a 12-story office tower in Anaheim. The bank has grown so much that its administrative offices occupy the second floor, too. Its neighbors include a Hooters restaurant, the Angel Stadium parking lot and a train station. "It's not exactly the kind of place where you pull in off the street," Cosgrove, who is the bank's chief executive, acknowledged. But with its specialty niche, Premier Commercial didn't need the visibility of retail banks. November Ratings Changes On 11-7 Ryan, Beck & Co Upgraded WL from Market Perform to Outperform and on 10-23 Keefe Bruyette Upgraded WL from Market Perform to Outperform. On 11-17 Prudential Equity Group upgraded Friday shares of Mellon Financial to overweight from underweight, increased its profit estimates for 2007 and lifted its target price on the stock to $48 from $35. Analyst Michael Mayo in a research note said he's more comfortable with Mellon's targeted margin improvement and that it should not result from aggressive expense capitalization. He noted "the structural story is better" and that Chief Executive Robert Kelly "has outlined a series of steps that should help liven up what we had considered a sleepy organization." Also, the company's revenue would be helped by stocks moving higher, the analyst said. October Ratings Changes On 10-6 Oppenheimer Downgraded HBAN from Neutral to Sell. On 10-18 Piper Jaffray Downgraded CBSS from Outperform to Market Perform. On 10-18 Janney Mntgmy Scott Downgraded FULT from Buy to Neutral. On 10-19 Boenning & Scattergood Downgraded FULT from Market Outperform to Market Perform and Cohen Bros Downgraded FULT from Buy to Hold. On 10-20 AG Edwards analyst David C. Stumpf downgraded UB to Sell from Hold and Sanders Morris Harris Downgraded it from Buy to Hold. On 10-23 AG Edwards Downgraded FMER from Buy to Hold. On 10-23 Keefe Bruyette Upgraded WL from Market Perform to Outperform. On 10-23 Cohen Bros Upgraded FNB from Hold to Buy but on the 30th Downgraded it back to Hold. On 10-25 Friedman Billings Downgraded CYN from Market Perform to Underperform. On 10-24 Ryan, Beck Upgraded VLY from Underperform to Market Perform. On 10-25-Oct-06 Ferris Baker Watts Downgraded SUSQ from Buy to Neutral. On 10-31 Prudential Downgraded CMA from Neutral to Underweight. On 10-23 Fitch Ratings said it revised its rating outlook for financial services provider FirstMerit and its subsidiary, FirstMerit Bank NA, to "Negative" from "Stable." Fitch said its outlook revision reflects the company's credit quality and operating performance, which continue to compare unfavorably with similarly rated peers. The ratings agency said that in spite of FirstMerit's ongoing efforts to improve credit quality, nonperforming assets and net charge-off levels have not significantly improved. On a positive note, Fitch said FirstMerit maintains solid tangible capital, a strong liquidity position and fairly diversified revenue sources, which support the rating affirmation. Home Page Factoids Previous Update |