|
Factoids Yahoo Banks Excite Banks Banking News Bankstocks.com 2007 Updates Aug Jul Jun May Apr Mar Feb Jan 2006 Updates Dec Nov Oct Sept Aug July Jun6 May April Mar Feb Jan 2005 Updates Dec Nov Oct Sept Aug July Jun May Aprl Mar Feb Jan 2004 Updates Dec Nov Oct Sept Aug July Jun May Aprl Mar Feb Jan 2003 Updates Dec Nov Oct |
Using the Forecaster Model In 2006, geography was destiny - and the metrics were misleading. It was a winning strategy to 'avoid' California and Oregon and 'buy' Texas and Oklahoma. The stocks that the analyst liked did not out-'total return' the stocks the analysts did not like. The low yielders failed to out-return the high yielders. Nor was buying the high P/E stocks or high Price/Book stocks a winning strategy. In a sector where the dividend payout ratio varies from 21% to 80%, it is not a surprise that the dividend discount model fails to be predictive. This sector sells at a fairly consistent P/E ratios despite wide variations in CAGRs. That is not logical. And the CAGRs also fail to be predictive of the stocks with high price to book ratios. That is not logical. I am not giving up hope that this sector can be forecasted. But my readers should be pessimestic about the predictions in the forecaster spreadsheet until it shows more signs of some success. This is the link to the 2006 stats for this sector, showing the projections based on 2006 begining of the year stats - along with the 2006 returns in the 'forecasting' spreadsheet which is the last of five spreadsheet posted - or roughly in the middle of the long page. RBC Centura to Acquire Alabama National AP 9-06 RBC Centura Banks Inc., a subsidiary of Royal Bank of Canada, said Thursday that it has agreed to acquire Alabama National BanCorporation. Shareholders of Alabama National, based in Birmingham, will receive $80 in cash, RBC Centura shares or a combination of each under the agreement. That marks a 51 percent premium to Alabama National's closing stock from Wednesday. The deal marks RBC Centura's third acquisition in the past 13 months as it continues to develop a large footprint across the Southeast. The company announced last August its plans to purchase Atlanta-based Flag Financial Corp. in a $456 million deal. In March of this year, RBC Centura said it would acquire 39 branches in Alabama from AmSouth Bank. Fitch Affirms UMB Financial Ratings AP 9-21 Fitch Ratings affirmed its investment grade default ratings for UMB Financial Corp. and its principle banking subsidiary. The ratings agency backed its investment grade 'A+' default rating and 'AA-' long-term deposits rating. The company's outlook is stable. Fitch said the Kansas City-based bank holding company's management team has used a strategy that improves earnings while still maintaining the company's conservative operating philosophy regarding capital, liquidity and credit quality. The ratings agency noted that UMB Financial's assets were particularly vulnerable during the long period of low interest rates and a flat to inverted yield curve. A flattening yield curve -- the result of rising short-term rates and comparatively low long-term rates -- squeezes financial institutions' net interest margin, which is the difference between when banks pay to borrow money and what they can earn when they lend it. Fitch also cited UMB's focus on improving efficiency, the closure of unprofitable branches and its exit from underperforming businesses. First Horizon to Sell 34 Bank Branches AP 9-25 First Horizon National Corp. said Tuesday it agreed to sell all 34 of its First Horizon Bank branches located outside of Tennessee to four different banks. Financial details were not disclosed, but First Horizon said the sales would result in a "small gain." M&T Bank Corp. will purchase 13 branches in Northern Virginia and Maryland. Ten branches in the Dallas area will be purchased by Sterling Bank. Fifth Third Bancorp is purchasing nine branches in the Atlanta area, while FMCB Holdings Inc. is acquiring two other branches in Georgia. The sales include certain loans and fixed assets, including the branch locations and all deposit relationships at the branches. Pacific Capital Inks 3 Year Deal with Jackson Hewitt AP 9-25 Pacific Capital Bancorp signed a new three-year agreements with affiliates of tax preparer Jackson Hewitt Tax Service for tax return and technology services. Pacific Capital will serve in the 2008 tax season the same number of Jackson Hewitt Inc.'s electronic return originators that it served the previous year. In the 2009 and 2010 tax seasons, Pacific Capital expects to increase that number as business grows. [The refund anticipatio loans generated by this relationship dramatically increases Pacific's net interest margins and makes the bank atypical.] Bank Earnings 101 Minyanville 9-10 From experience, I have found that most people are surprised to learn that banks’ net income is generally only between 1 and 2% on assets. And many people are also unaware that banks are generally leveraged 10:1. So why are these points important? First, small changes in interest rates and loan losses have a big effect on bank earnings. For example, in 2006, BofA had 70 basis points of loan losses, but in 2002 that figure was 110 basis points – a 40 bps difference. All things being equal, (and ignoring income taxes for simplicity) if we applied BofA’s 2002 level rate to its 2006 results, earnings would have been 28% lower. Further, given that borrowing spreads and loan losses are highly correlated (you pay more when your portfolio is of lesser and lesser quality) a 40 basis point increase in losses could also bring with it a 25 basis point increase in funding costs. So, going back to my example, if we applied both the 40 basis point increase in losses and a 25 basis point increase in funding costs, BofA’s earnings would have dropped by 45%. Now while it takes time for higher losses and funding costs to flow all the way through to the bottom line (not all debt rolls over at once; nor do all bad credits charge off at once), I hope you can see by this example why the financial services community is so fixated on Federal Reserve interest rate cuts. By dropping short term interest rates, the Federal Reserve helps to offset the impact of higher borrowing spreads and loan losses. The difference between and a 25 and 50 basis point cut may not feel like much to you, but when all you're earning at best is 1-2% on assets, it is a huge deal. Bank Earnings 102 - The Best of Times, The Worst of Times Minyanville 9-11 In Bank Earnings 101, I provided an overview on the key drivers of bank income statements. Again, I can’t emphasize enough the importance of understanding the basics of how banks make money. They are the largest sector in the S&P 500 and a strong banking sector is a prerequisite for a strong economy. At the same time, however, I am now going to ask you to ignore the net income figures that are announced by financial services firms at the end of this quarter. As much attention as they will get, in the bigger scheme of things, their net incomes this quarter don’t matter. And they don’t matter because of one simple rule for financial services firms: The income statement is the past. The balance sheet is the future. Let me repeat it again. The income statement is the past and the balance sheet is the future, especially now. At the top of a credit cycle, the income statement for a financial institution shows “the best of times”, but buried in the balance sheet is “the worst of times” to come. To explain: First, this particular quarter truly is the best of times and worst of times for financial services firms. Literally half of the quarter (through August 16) was “Goldilocks LaLa Land” and the other half was God-awful. Trying to extrapolate this quarter’s earnings into any kind of meaningful projection will be all but impossible. And even when pressed, I doubt you will see too many firms highlight their monthly trends within the quarter to help you. (Although watch who feels compelled to share their month-to-month earnings. This is a great tell as to who may be experiencing the most funding pressure.) At least to me, this quarter’s results will be scrambled eggs: banking analysts looking for yolks will see one thing, and analysts looking for whites will see another. There is too much good and bad mixed into this quarter to make clear decisions based solely on net incomes. But you can be sure that CNBC will be filled with debates as to who met or missed expectations. To be clear - it doesn’t matter. History repeatedly reveals the ability of highly profitable banks to go down in flames. How many of you remember Texas Commerce Bank – AAA at the top, but gone at the bottom of a severe credit cycle? Second, one quarter does not complete a credit cycle. We are at the beginning of a material economic change. Remember, we have only just seen the first month of employment decline. Loan loss provisions are predicated on the present economy, not on possibly better or worse future economies. This quarter’s provisions are likely to be relatively light based on the strength of our current economy. Similarly, any funding cost increases are just beginning to impact net interest margin. Go back and read the 3Q '05 financial results for a few homebuilders and you will get my point. Few reveal any clues to their future demise– particularly the potential for balance sheet writedowns. And I expect the same this quarter for many banks. Unless they were hit directly by credit issues related to sub-prime mortgages or liquidity issues around the mortgage or asset-backed commercial paper markets, you probably won’t see much. But in much the same way as the housing industry has taken one-time write down after one-time write down for land values, I anticipate that we will see increasing loan loss provisioning by banks as the economy continues to weaken. Remember, the loans have been made. The only questions now are how severe the downturn will be and how many borrowers will be affected. If the housing industry’s forecasting prowess is any indicator, I would suggest we have a long way to go before we see the bottom of this cycle. Finally, and thanks to GAAP accounting, not all gains and losses flow through bank income statements. While I am not an accountant, my understanding is that all foreign currency translation adjustments, minimum pension liability adjustments, unrealized gains or losses on available-for-sale investments, net unrealized losses on SFAS 133 derivatives and even some securitization related items skip the P&L and are reported directly as adjustments to shareholders equity. So, even if you look, you won’t find them in bank income statements and they don’t touch earnings per share. To find out what these items are you will need to read something called the “Comprehensive Income Statement”. And that is where I intend to start. I don’t know about you, but to me one of the most important figures I am going to be focused on this quarter is “unrealized gains or losses on available-for-sale-investments”. For financial services firms with large trading positions, my guess is that there is a lot paper sitting in inventory. The Comprehensive Income Statement will reveal the level of pain associated with it. In a follow up piece, I’ll help you do some detective work in a bank’s balance sheets. That is where most of the clues about the future will be found. Bank Earnings 103: Reading Bank Balance Sheets Minyanville 9-14 While I anticipate that most of Wall Street’s attention at the end of the third quarter will be on bank earnings, for reasons I outlined in Banking 102, I strongly recommend that you focus on bank balance sheets. From experience, changes in bank balance sheet composition are much better predictors of future earnings than current period income statements. So where do you start? First, I would look at changes across the four different major investment/loan categories. In investments “held for trading”, I would look for a significant overall balance reduction and an upgrading in quality. Both would be indications of a reduction in overall market risk appetite and a willingness to allocate capital to “volatile” capital markets and related businesses. In investments “held for sale”, I would also look for a reduction in balances. As I mentioned in “Whispers from the Confessional”, I expect that you will see many financial institutions reducing their “available for sale” assets given the decline in secondary market liquidity. Watch as to where the assets went. There should be associated disclosure if the assets were moved into portfolio. And remember that once in portfolio, the accountants make it very difficult to move them back out to “held for sale.” So these moved assets will have to be funded through to maturity. For investments “held to maturity” I would go right to the footnotes. These investments require fair market value determinations (many times subjective forecasts of future performance). Particularly for capitalized assets associated with previously securitized assets there may be changes in assumptions that drive upward or downward revisions in valuation. This quarter I would be focused on any downward valuation changes due to higher loss rates and as well as upward valuations due to lower payment rates. Both would be warning signs. Finally, I would look at changes in the general loan category. And here, while changes in composition may be telling, the more important factor to me is how overall loan growth compares to deposit growth. If loan growth is outpacing deposit growth the institution must fill the gap through borrowings. As a general rule, borrowed money is more expensive and less “stable” than core deposits. Associated with the loan portfolio, I would also review the loan loss allowance. Material changes in the allowance ratios (provision to charge-offs and provision to loan balances) are warning signs. So too are increases in loan portfolio delinquency statistics. Remember, credit cycles play out over a long period of time. The final asset category I would look at is “goodwill and other intangibles”. Accounting rules require writedowns of these assets when the associated earnings/cashflow no longer support the balance sheet value. When you see this, you should immediately ask “Why?” Once I have reviewed the asset side of the balance sheet I turn to capital. And this quarter, I am focused on a couple of things. First, what happened vis-à-vis stock buy-backs? Many banks provided buy-back projections at the end of the second quarter. Check to see if they followed through. If not, why? Second, did the bank issue subordinated debt/preferred stock? Both are capital items. As I wrote earlier, in this market environment you wouldn’t issue them unless you really needed to. Finally, I would look at all of the capital related leverage ratios. Is leverage increasing or decreasing? And has management changed its targets for capital up or down? Rising capital targets (reduced leverage) are indicative of defensive management concerned about the future. Ratings & Dividend Changes On 9-12 Credit Suisse initiated coverage of 16 U.S. banks. Ten banks were given a "Neutral" rating by Credit Suisse: Wells Fargo, Regions Financial Corp., U.S. Bancorp, Community Bancorp, CVB Financial, First Community Bancorp, M&T Bank, Synovus Financial, TCF Financial and Umpqua Holdings. Three banks were given an "Outperform" rating, Credit Suisse's equivalent to a "Buy": BB&T Corp., Colonial BancGroup Inc. and Zions Bancorp. Among those with outperform ratings, Zions has the largest upside to share price, according to Credit Suisse. Coverage was initiated on Zions with a 12-month price target of $85, a 22 percent premium over Tuesday's closing price of $69.44. On 9-24 Rodman & Renshaw Initiated ZION at Market Outperform City National Corp. received an "Underperform" rating, Credit Suisse's equivalent to a "Sell." Credit Suisse initiated coverage of City National with a price target of $71. Shares of City National closed Tuesday at $69.99. UnionBanCal Corp. also received an "Underperform" rating, with a price target of $58. Shares of UnionBanCal closed Tuesday at $58.15. Western Alliance Bancorp was the third to receive an initial rating of "Underperform." Credit Suisse set the price target for the company at $25, 93 cents below the company's Tuesday closing price of $25.93. On 9-10 B. Riley Initiated HBHC at Buy. On 9-10 Friedman Billings Downgraded ZION from Outperform to Market Perform. On 9-12 Janney Mntgmy Scott Initiated FHN at Buy. On 9-19 Stifel Nicolaus Downgraded HBHC from Buy to Hold. On 9-19 Lehman Brothers Downgraded CFR from Overweight to Equal-weight, Upgraded PCBC from Underweight to Equal-weight, and Upgraded ZION from Underweight to Equal-weight. On 9-19 Sun Trust Rbsn Humphrey Downgraded ZION from Buy to Neutral. On 9-28 Keefe Bruyette Upgraded CFR from Market Perform to Outperform, Downgraded CNB from Outperform to Market Perform and Downgraded FHN from Market Perform to Underperform. On 9-21 Merrill Lynch downgraded Regions Financial to sell from neutral, citing the recent modest price rebound after the U.S. Federal Reserve cut interest rates by half a percentage point. The broker told clients that a Fed easing cycle should have a modest negative impact on the bank's earnings and that the stock's recent 2% rally is not supported by fundamentals. It added that Regions Financial's fee revenue is susceptible to capital markets weakness and slower mortgage volume. Finally the broker said RF's earnings will likely suffer from rising credit losses and synergies from the merger with AmSouth look set to fall short of management's targets. On 9-12 UMPQ declard a dividend of $0.19/share, an increase of $0.01 from the previous quarter. The dividend is payable on October 16, 2007, to shareholders of record as of October 1, 2007. On 8-06 RBC Capital Markets Upgraded CFR from Sector Perform to Outperform. On 8-07 Friedman Billings Upgraded FHN from Underperform to Market Perform. In a note to clients, Friedman Billings Ramsey analyst Gary Townsend wrote there is minimal downside risk for First Horizon, despite its reliance on mortgage revenue, because of its 6 percent dividend and 1.79-times book multiple. A weak housing market and an illiquid secondary mortgage market will provide headwinds for First Horizon in coming quarters, Townsend said. Mortgages have increasingly gone delinquent in recent months, putting a strain on a banks' ability to sell mortgages to investors. On 8-10 AG Edwards Upgraded UB from Sell to Hold. On 8-23 Merrill Lynch downgraded a raft of mid-cap regional banks citing a range of factors including lower earnings expectations and the potential for margin erosion at some of the banks if the Federal Reserve cuts interest rates. The broker said banks with balance sheets that are very "asset sensitive" -- meaning their assets reprice more quickly than liabilities -- could face margin pressure. It downgraded City National [CYN], Zions Bancorporation [ZION], Associated Banc-Corp [ASBC], Cullen/Frost Bankers [CFR], Cathay General Bancorp [CATY], FirstMerit [FMER], First Midwest Bancorp [FMBI] and Texas Capital Bancshares [TCBI] all to sell from neutral. It also downgraded SVB Financial Group [SIVB] to sell from buy. On 8-30 Punk, Ziegel & Co Upgraded FHN from Sell to Market Perform. On 8-01 BOKF declared a dividend of 20 cents/share, payable on or about Aug. 30, 2007, to shareholders of record on Aug. 15. On 8-15 FNB raised its dividend to 24 cents, payable 9-15 to shareholders of 9-01-07. On 8-21 HBHC declared a dividend of $0.24 per share, payable 9-14 to shareholders of 9-04-07. On 8-22 WTNY declared a dividend of $.29/share, payable on October 1, 2007 to shareholders of record as of September 14, 2007. On 8-22 ALAB declared a dividend of $0.41/share payable October 3, 2007 to stockholders of record of September 15, 2007. Home Page Factoids Previous Update |