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Fitch Offers Grim Outlook for Banks TheStreet.com 6-19 Sharon Haas, managing director of Fitch's financial institutions group, said banks with exposure to asset classes under considerable stress, including mortgages, home equity and even credit cards face a tough road ahead. "There have been many downgrades on U.S. banks and there will likely be more downgrades," Haas said. Still, Haas is not expecting "massive" debt rating changes across the banking industry. Banks are still able to service their debt obligations resulting in debt ratings that are largely "still in good shape". Banks largely had gone into this latest credit cycle -- led by a decline in consumer loan portfolios -- with weaker loan reserve ratios as compared to previous cycles, because credit had been relatively benign over the past few years, and banks base their reserve ratios on historical looks back. The credit crisis, beginning last year, became an issue "very rapidly" and "significantly" more than expected, she said. Therefore, Hass anticipates banks playing "catch-up" as they continue ramping up their loan reserves. On average, residential first mortgages make up 20% of banks' loan portfolios, while charge-offs have spiked to roughly 0.55% to 0.60% of total loans as of the first quarter, up from roughly 0.15% a year earlier, according to Fitch presentation materials. Fitch is particularly concerned about the deterioration in home equity loans and the resulting mess that it causing banks. Charged-off home equity loans also jumped from the third quarter to the fourth quarter. They are still rising, as a result of declining home prices and the fact that banks that hold the home equity lines of credit are likely last on the list to recover a loan that is delinquent.Home equity loans that go into delinquency "are almost always write-offs," Haas said. "The loss severity is extremely significant." On the commercial loan side, troubled areas are mostly contained to the "sliver related to housing that is lumped into commercial real estate," she said. This is particularly troubling to regional and small community banks that have a large portion of their equity tied to residential construction loans. On average, regional banks have half of the equity in residential construction, but in some cases can run as much as 800% of total equity, compared to around one-quarter of the equity for the largest banks, Haas said. Citizens To Do $200 Million Secondary Offering / Announces Q2 Charges PRNewswire 6-05 Citizens Republic Bancorp (CRBC) announced that it has commenced concurrent offerings of common stock and contingent convertible perpetual non-cumulative preferred stock totaling $200 million. As a result of ongoing volatility in the financial industry, Citizens' market capitalization decreasing to a level below tangible book value, and continued deterioration in the credit quality of Citizens' commercial real estate portfolio, Citizens determined it was necessary to perform an interim goodwill impairment test during May 2008. Effective May 31, 2008, Citizens recorded a non-cash goodwill impairment charge of approximately $180 million, representing Citizens' current estimate of the amount of goodwill impairment. Due to continued deterioration in the underlying collateral values for loans secured by real estate and the continued challenges in the Midwest economy, Citizens performed a comprehensive evaluation of its nonperforming commercial real estate and residential mortgage loan portfolios, its commercial loans held for sale portfolio and its commercial and residential other repossessed assets portfolios during May 2008 to identify certain assets that Citizens elected to market for sale. Based on this review, Citizens recorded a $47.1 million ($30.6 million after-tax) credit-related writedown effective May 31, 2008. Real-Estate Woes of Banks Mount Corkery, Karp & Paletta, WSJ 6-06 Federal regulators warned Thursday that banking-industry turmoil would continue as financial institutions come to terms with piles of bad loans they made to finance the construction of homes and condominiums. Until now, most of the damage to banks from the housing crisis has come from homeowners defaulting on their mortgages. But amid a dismal spring sales season for new homes, loans to home and condo builders are looking increasingly shaky. Banks have begun to dump them at what will likely be steep discounts, setting the stage for billions of dollars in fresh losses. "As long as the housing market is on a downward path, as long as those prices continue to fall, I think there's a risk that the losses could continue to mount on a variety of loans," Federal Reserve Vice Chairman Donald Kohn told the Senate Banking Committee Thursday. At the same hearing, Federal Deposit Insurance Corp. Chairman Sheila Bair said banks that aren't diversified, or those with high exposures to residential construction and development, are of particular concern. "That's where we are really seeing the delinquencies spike," she said. The surprisingly gloomy outlook is at odds with the sentiment of investors, who appear to have moved on from worrying about the health of the financial system to obsessing about gasoline prices and consumer spending. The Dow Jones Industrial Average rose 213.97 points, or 1.7%, on Thursday on the back of surprisingly strong retail-sales data. The health of the economy is heavily dependent on the willingness of banks and other financial institutions to lend to consumers and businesses. Many banks have already taken substantial losses, and either will have to pare their lending or raise new capital to rebuild their safety nets. The Federal Reserve and Treasury Department have been pressing banks to raise capital so as not to further reduce lending. Banks with swelling portfolios of troubled loans tied to land and housing are struggling to unload some of their real-estate debt. IndyMac Bank, a savings-and-loan association in Pasadena, Calif., is trying to sell $540 million in loans made to finance land purchases and housing construction projects, mostly in California. Winning bids on many of the loans were, on average, about 60 cents on the dollar, according to people familiar with the matter. But some winning bids were only about 20 cents on the dollar. Cleveland-based KeyBank is trying to unload $935 million in loans tied to land and residential developments, while Wachovia Corp. is shopping a $350 million loan portfolio, according to two people who have seen the offerings. Representatives of the banks declined to comment. Over the next five years, U.S. banks could "charge off" as bad debt between 10% and 26% of their loans tied to residential construction and land assets, which would amount to about $65 billion to $165 billion, according to a report sent to clients Thursday by housing research firm Zelman & Associates. That compares with charge-offs of about 10% of construction-related bank assets, totaling $31.6 billion, when adjusted for inflation, during the last housing downturn in the late 1980s and early 1990s. In 2007 and the first quarter of this year, banks wrote down just 0.7% of such assets, according to Zelman. "We believe this period of procrastination is nearly over," said Ivy Zelman, chief executive of Zelman & Associates. The prospect of a new wave of losses worries federal regulators, given the large proportion of loans to housing developers held by many banks and thrifts. The problems are worse at small banks that can't easily absorb losses, and at banks with big exposure in states hit hard by the housing crisis. Banks in Arizona have 36% of their total loans tied to construction and development. In Georgia that number is 34%, and in North Carolina it's 28%. Zelman said construction and development loans, as a percentage of total loans, are at their highest levels since at least 1975. IndyMac is trying to sell debt backed by a grab bag of assets, including partially built subdivisions, condo buildings and large parcels of raw land covered in sagebrush in parts of California, where the housing crisis is acute, according to people familiar with the offering. Selling real-estate loans could help larger banks like IndyMac shore up their balance sheets. But such sales, by setting a market value for distressed real-estate loans, could trigger problems at smaller banks with real-estate exposure, which might have a difficult time absorbing such losses. Office of Thrift Supervision Director John Reich told Congress that the number of savings-and-loan associations at a heightened risk of failure jumped from 12 at the end of March to 17 today. Federal regulators have met privately with Treasury officials to discuss the potential fallout from a larger number of bank failures, people familiar with the matter said. Four banks have already failed this year, more than in the prior three years combined. The FDIC's Ms. Bair said she would be "very surprised" if a large bank failed, but added that "we need to be prepared for all contingencies." Federal regulators said they have increased scrutiny over banks with high concentrations of commercial real-estate loans, with Comptroller of the Currency John Dugan saying a formal initiative is in place to review asset quality. At the same time, regulators praised the banking industry for raising capital and for building up reserves against losses. They added that some pockets of the credit markets were showing signs of improvement. Over the last week, direct lending by the Federal Reserve to investment banks and commercial banks declined, suggesting that credit strains across the industry were easing. Average daily borrowing by securities firms was $8.3 billion in the week ending Wednesday, down from $12.3 billion a week earlier, the Fed said Thursday. Real-estate lenders had been hoping for a decent spring sales season for new homes, which would have increased the value of the loans they're holding. But the selling season has been a bust, and the rate of foreclosures hit a record, as did the rate at which homeowners fell behind on their payments. In the first quarter, 6.35% of mortgages were at least 30 days delinquent, not including those already in foreclosure, a rise of 1.51 percentage points from the year-earlier period. "We've seen a real change in the market," says Ricardo Chance, a managing director at KPMG Corporate Finance LLC, who is helping troubled builders restructure their businesses "Finally the banks are capitulating and saying, 'Let's mark to market and flush this all out.' The market is going to get worse. We don't want to hold on to this stuff." The glut of foreclosed homes has made life hard for home builders. "I've been through three cycles, and this is the worst," says Mark Connal, a vice president at Michael Crews Development, a closely held Escondido, Calif., builder. "You can buy brand new homes for less than the cost of construction." At the peak of the housing boom, during the second quarter of 2005, luxury-home builder Toll Brothers Inc. signed 3,120 contracts. In its latest quarter ended April 30, buyers signed just 929 contracts for new homes in the builder's 300 communities across the nation. In Riverside County, Calif., where the housing market is dismal, developers are offering upgrades and services to move unsold homes. "They used to landscape the front yard," says Gloria Britt, of Prudential California Realty in Riverside. "Now they're doing the back, upgrading the patio, whatever the buyer asks for." Banking turnaround likely in '09 AP 6-17 Four major hurdles must be crossed before a broad recovery in the banking sector, and that might not occur for another six to nine months, according to a new research report from Goldman Sachs. The sector is only likely to rebound broadly when credit costs have stabilized, banks complete a process of recapitalization, consensus estimate ranges for earnings narrow and the yield curve steepens, Goldman Sachs analysts wrote in the report, which it based on looking at past credit cycles. Goldman Sachs estimates credit losses resulting from continued deterioration in the mortgage and lending markets will not peak until early 2009, making a broad-based rally in the sector unlikely before the end of 2008. Goldman Sachs estimates peak losses will occur during Q1-09, with charge-off ratios reaching, on average, 1.39%. Charge-off ratios were at about 0.95% during Q1, and Goldman Sachs expects them to rise to about 1.12% for Q2. Charge-offs are loans written off as not being repaid. The ratio measures charge-offs as a percentage of the size of a bank's total loan portfolio. Banks also must continue to raise new capital before share prices can rebound. Goldman Sachs estimates the recapitalization process is about two-thirds complete for U.S. banks and the risk of insolvency has been significantly reduced. U.S. banks have raised about $120 billion and will need to raise an additional $65 billion, Goldman Sachs wrote in the report. But with loss estimates still changing and some banks still needing to raise capital, analyst estimates vary widely from bank to bank, Goldman Sachs said. The variations in future earnings estimates means there is no agreement where earnings or book value of banks will stabilize during the credit downturn, according to the report. "We watch for a tightening of the consensus range, which is at record highs," Goldman Sachs said in the report. "When the range tightens, it will signal confidence in where book values stabilize." The one factor likely already completed is the steepening of the yield curve, Goldman Sachs said. The Federal Reserve has significantly cut interest rates to try and help boost the financial markets and the economy, which has led to a steeper yield curve. But, Goldman Sachs notes a steepening yield curve during this cycle might not provide the benefit of past cycles because banks earn more money on fees now and the easing by the Fed has yet to improve tight credit conditions. Because of revisions to credit costs and loss estimates, Goldman Sachs also reduced price targets and 2008, 2009 and 2010 earnings estimates for some national, regional and trust banks because of the likely continued increase of credit-related losses. FITB Cuts Dividend, to Issue Shares Bizwire 6-17 Fifth Third (FITB) announced that it will offer $1 billion in depositary shares, each of which represents 1/250th interest in shares of its convertible preferred stock. FITB also plans to raise $1 billion from the sale of non-core assets. FITB also cut its dividend to $0.15/share, compared to 44 cents in the first-quarter. Fitch Downgrades Ratings on Fifth Third MarketWatch 6-18 Fitch Ratings on Wednesday cut its long-term issuer default rating on Fifth Third Bancorp to 'A+' from 'AA-' and said that the rating outlook is now stable. Fitch said the downgrade "reflects the company's deteriorating trends in asset quality, expectations for elevated levels of problem assets in the near term, and a decline in profitability." Fitch Affirms Huntington Ratings MarketWatch 6-27 Fitch Ratings said Friday it took the ratings of Huntington Bancshares off review for a possible downgrade. Fitch affirmed its ratings on Huntington, which includes an A- issuer default rating and a short-trem IDR of F1, and said the outlook is stable because of the bank's improved capital and financial position. Ratings & Dividend Changes On 6-09 SNV declared a dividend of $0.17/share payable on July 1, 2008, to Synovus shareholders of record as of the close of business on June 19, 2008. On 6-17 USB declared a dividend of $0.425/share payable July 15, 2008, to shareholders of record at the close of business on June 30, 2008. On 6-17 FITB declared a reduced dividend of $0.15/share compared to $0.44/share in Q1, that will be payable July 22 to shareholders of record as of June 30th. On 6-24 BBT declared an increased dividend of $0.47/share to be paid Aug. 1 to shareholders of record as of July 11. On 6-03 U.S. Bancorp said its lead bank, U.S. Bank N.A., has closed its acquisition of Mellon 1st Business Bank, a subsidiary of the Bank of New York Mellon Corp. Financial terms of the cash deal were not disclosed. U.S. Bank said it has added $2.9 billion in assets, $1.1 billion in loans and $2.7 billion in deposits as a result of the acquisition. On 6-06 analysts at Keefe, Bruyette & Woods on Friday upgraded shares of National City (NCC), which were down nearly 5% at last check on a report that regulators have effectively put the bank on probation, to outperform from market perform on valuation. "Although we believe fundamentals will continue to be challenging over the near term, we also believe the company has raised sufficient capital to absorb potential credit losses," KBW analysts wrote in a research note. On 6-19 a Sterne Agee analyst Adam Barkstrom cut his price target to $21 for BB&T while also reiterating a "Sell" rating and warning the regional bank might need to cut its dividend amid continued credit deterioration. However, BB&T said in a statement Thursday that its cash levels remain strong and management expects "some increase in the cash dividend in 2008." The company noted it has increased its dividend 36 straight years. Barkstrom said that if credit quality continues to deteriorate at BB&T as he expects, the bank will likely have to cut its dividend by more than 50% to maintain current capital ratios. Barkstrom did say BB&T still is stronger than some of its peers as it is unlikely the bank will have to raise new cash to shore up its capital position. "Despite our negativity toward the stock driven by what we think will be continued notable credit deterioration, we do believe the shares justify a premium valuation relative to its peers based on strong core income, attractive markets and continued loan and deposit growth during a very challenging market," Barkstrom wrote in a research note. Barkstrom reiterated his 2008 earnings estimate of $2.90 per share and 2009 earnings estimate of $3.20 per share. On 6-20 Keefe Bruyette Upgraded FITB from Market Perform to Outperform. On 6-20 UBS reiterate their "neutral" rating on FITB but reduced the target price from $22 to $10. On 6-24 Fox Pitt Downgraded MI from Outperform to In Line. On 6-13 BMO Capital Markets downgrade Fifth Third (FITB) from outperform to market perform. On 6-19 Richard Bove of Landenburg Thalmann maintained his "neutral" rating on FITB, while reducing his estimates. The target price has been reduced from $25 to $11. Bove mentioned that FITB has indicated that its non-performing assets would rise from 40% to 45% in the current year and possibly further going forward. FITB has reduced its dividend from $1.76 to $0.60 and intends to raise reserves to 2% of its loans and write-off existing loans at an annual rate of 1.7%. FITBis likely to raise going forward $1 billion via the sale of a new convertible preferred offering. The EPS estimates for 2008, 2009 and 2010 have been reduced from $2.04 to $1.32, from $2.31 to $1.91 and from $2.67 to $2.21. On 6-19 RBC Capital Markets maintain their "sector perform" rating on FITB, while reducing their estimates. The target price has been reduced from $22 to $11. FITB has released a mid-quarter update and declared several initiativese targeted to help FITB focus on its core banking business and withstand the credit crisis in Florida and Midwestern regions. The EPS estimates for 2008 and 2009 have been reduced from $2.00 to $0.82 and from $2.36 to $1.00. On 6-19 Robert W Baird maintained their "neutral" rating on FITB while reducing their estimates. The target price has been reduced from $24 to $13. The EPS estimates for 2008 and 2009 have been reduced from $1.97 to $1.25 and from $2.20 to $1.50, respectively, reflecting the impact of the proposed capital raise and expectation of continuing high credit cost levels. On 6-19 analyst Jason Goldberg of Lehman Brothers maintained his "equal weight" rating on FITB. The target price has been reduced from $25 to $13. The EPS estimates for 2008 and 2009 have been reduced from $1.80 to $1.18 and from $2.05 to $1.40, respectively. On 6-09 Jason Goldberg of Lehman Brothers maintained his "equal weight" rating on Marshall & Ilsley [MI], but reduced his target price from $27 to $26. The EPS estimates for 2008 and 2009 have been reduced from $2.15 to $2.05 and from $2.25 to $2.15, due to the current challenging operating environment, characterized by a rise in loan loss provisioning and net charge-offs. On 6-23 Richard X Bove of Ladenburg Thalmann maintained his "neutral" rating on MI but reduced his target price from $23 to $19. The EPS estimates for 2008 and 2009 have been reduced from $2.09 to $1.77 and from $2.21 to $1.75. In a research note the analyst mentions that MI has large residential real estate holdings in states that suffer from serious over building problems. MI funds its real estate portfolios with huge jumbo CDs and wholesale deposits, making the company highly exposed to short-term interest rate increases, the analyst says. On 6-26 Keefe Bruyette upgraded City National (CYN) from "market perform" to "outperform." Analyst Brian Klock believes that the bank's loan portfolio should outperform others because of its demographics and "affluent customer base." Conservative underwriting will also help the bank avoid facing losses as big as some others, Klock wrote. City National will face some losses though because of deterioration in the credit market. Because of those expected losses, Klock reduce his 2008 earnings estimate to $3.45 per share from $3.55 per share and his 2009 estimate to $4.20 per share from $4.60 per share because of higher provisions for loan losses. He cut his price target $1 to $48 to reflect the lower earnings projection. On 6-16 Analysts Lehman Brothers maintain their "overweight" rating on City, while reducing their estimates for the company. The target price has been reduced from $53 to $49. In a research note, the analysts mention that CYN is focusing on bolstering its deposit growth through client acquisition and new product introductions. CYN's AFS securities continued to decline and have now reached the $2 billion level. CYN's capital ratios and loans/reserves are expected to rise by end-2008, the analysts say. The EPS estimate for 2009 has been reduced from $4.35 to $3.95. On 6-25 Citigroup Initiated HBAN at Hold. The target price is set to $7. On 6-20 Keefe Bruyette reiterated their "market perform" rating on Huntington. The target price has been reduced from $10 to $7. On 5-15 FMER declared a dividend of $0.29/share payable June 16, 2008, to shareholders of record on June 2, 2008. On 5-15 VLY declared a decreased dividend of $0.20/share payable July 1, 2008 to shareholders of record on June 6, 2008. On 5-20 CMA declared a dividend of $.66/share payable July 1, 2008, to shareholders of record June 15, 2008. On 5-28 FMBI declared a dividend of $0.31/share payable on July 15, 2008 to stockholders of record as of the close of business on June 27, 2008 On 5-05 Deutsche Securities Upgraded CAM from Hold to Buy. On 5-06 Keefe Bruyette Upgraded CRBC from Market Perform to Outperform and Oppenheimer Upgraded CRBC from Perform to Outperform. On 5-06 FTN Midwest Upgraded CMA from Neutral to Buy. On 5-19 Citigroup Upgraded NCC from Hold to Buy. On 5-29 Sterne Agee Initiated CMA at Buy and Initiated NCC at buy. On 5-04 Deutsche Bank analyst Mike Mayo upgraded shares of Comerica to "Buy" late Sunday, saying the bank's stock is inexpensive and faces relatively little risk from loans to consumers. Mayo said CMA is doing well in non-consumer lending businesses, taking only small losses in the first quarter. Only 8% of CMA's loans are consumer related, he wrote. Based on a conversation with management, Mayo said he expects small, stable loan losses for the rest of this year. He raised his rating from "Hold," and said the stock is worth $52 per share. Comerica stock finished at $37.89 Friday. Mayo's previous price target was $36 per share. He added that when the Fed takes a pause from cutting interest rates -- or begins to raise them -- CMA will benefit. He trimmed his profit estimates for 2008 and 2009, however. Home Page Factoids Previous Update |