|
Factoids Yahoo Banks Excite Banks Banking News Bankstocks.com 2008 Updates May Apr Mar Feb Jan 2007 Updates Dec Nov Oct Sept 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. This is the link to the 2007 stats page. Banking Lessons from Buffett Jim Sinegal, Morningstar 6-09 Recent events in the financial markets have taken a heavy toll on the stock prices of many banks, with many such stocks trading at multiyear lows. However, not all financial institutions are created equal, as shareholders of Bear Stearns and Countrywide Financial (CFC) learned in recent months. With that in mind, we looked to Berkshire Hathaway's (brk.b.B) Warren Buffett for help in separating the wheat from the chaff. "The banking business is no favorite of ours," Buffett wrote in his 1990 letter to Berkshire Hathaway shareholders. "When assets are twenty times equity--a common ratio in this industry--mistakes that involve only a small portion of assets can destroy a major portion of equity. And mistakes have been the rule rather than the exception at many major banks." While Buffett was referring to the S&L crisis at the time, he could easily have been discussing the current problems in the mortgage market. Buffett's warnings on the dangers of leverage are similarly timeless. When buying a debt-free business, a 10% error in calculating the fair value of the enterprise is well within the margin of safety included in our 5-star price. But a similar error in valuing a highly leveraged financial institution could be the difference between investing in a bargain and a bankruptcy. When assets exceed 30 times equity--as in the case of investment banks Morgan Stanley (MS) and Lehman Brothers (LEH)--the margin for error is even smaller. For this reason, we believe Morningstar's fair value uncertainty rating is especially important when evaluating a potential investment in a financial company. The lower a stock's uncertainty rating, the more confidence an analyst has in the accuracy of the stock's fair value estimate. Buffett also emphasized the importance of management. "Because leverage of 20:1 magnifies the effects of managerial strengths and weaknesses, we have no interest in purchasing shares of a poorly-managed bank at a 'cheap' price. Instead, our only interest is in buying into well-managed banks at fair prices," he wrote. Buffett was buying Wells Fargo at the time, a bank that still receives our highest Stewardship Grade. Other banks in the Berkshire portfolio include M&T Bank, U.S. Bancorp, and Bank of America - all of which receive high marks for stewardship from Morningstar analysts. While the quality of management is important in all businesses, it is especially important in banking, where a relatively small mistake by a CEO can lead to disaster for shareholders. Buffett went on to explain an additional risk in the banking business: that of the "institutional imperative--the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so." Almost 20 years later, Buffett's words still ring true. Few financial institutions managed to resist the temptation to jump headlong into subprime mortgages, CDOs, and other questionable products. Banks that loaded up on home equity and construction loans during the housing boom are also now suffering the consequences. Again, Buffett's writings proved prescient: "In their lending, many bankers played follow-the-leader with lemming-like zeal; now they are experiencing a lemming-like fate." Managers of some of the country's largest financial institutions indeed experienced this fate in the past year, including Chuck Prince of Citigroup, Stan O'Neal of Merrill Lynch, and most recently, Ken Thompson of Wachovia. Taking Buffett's advice into account, we used Morningstar's Premium Stock Screener tool to search for other banks that might meet his criteria. We looked for regional banks with low Uncertainty Ratings, Stewardship Grades of B or better, and Morningstar Ratings of 4 or 5 stars. Not surprisingly, only a few stocks met this lofty set of criteria.
During the housing boom, local banks and thrifts struggled to compete for mortgage business with aggressive brokers and national lenders. Now, some community banks are regaining market share as those rivals scale back or go out of business. Hingham Institution for Savings, based in a Boston suburb, is one of the small banks now doing more mortgage business even as tighter credit and the housing slump shrink the overall market for home loans. Unlike most lenders, Hingham doesn't use computer software to determine which borrowers qualify. Instead, a nine-member executive committee reviews each loan application. Its loan-origination staff is salaried rather than paid a volume-based commission that can fuel aggressive selling. Hingham, founded in 1834, has good reasons to be extra-careful in assessing borrowers' ability and willingness to repay: It holds onto its mortgage loans rather than peddling them to investors. "It's old-time banking," says Michael J. Sinclair, a vice president at Hingham. Despite a nationwide slump in mortgage lending, this retro formula is working so well that Hingham and similar community banks are seeing a resurgence. Its home-loan volume is up 30% in the first four months of the year to $24 million. And mortgage loan originations at Hudson City Bancorp, a Paramus, N.J., thrift holding company, surged 26% in the first quarter from a year earlier, to $820.4 million. In contrast, total U.S. home-mortgage originations in the first quarter dropped 29% to $480 billion, estimates Inside Mortgage Finance, a trade publication. Tiny thrifts like Hingham and midsize institutions like Hudson City will never be the nation's dominant mortgage lenders, of course. The top 10 U.S. mortgage lenders, mostly units of large banks, accounted for 72% of loans originated in the first quarter, Inside Mortgage Finance says. Still, the gains by small banks show that the giants of the industry won't have the field to themselves. Small banks are getting more business largely because many mortgage brokers are going out of business. Like the small banks, brokers are local firms, but they often originate loans that are funded by national lenders, bypassing the local bank. The number of U.S. mortgage brokerages is likely to fall to about 30,000 by year's end from 53,000 in early 2007, says Wholesale Access, a research firm in Columbia, Md. For consumers, one attraction of local lenders is that there is no need to spend hours trying to reach the right person on a phone if problems arise. Charles Palmieri, an electrician in Cohasset, Mass., has had mortgages from national lenders but decided to use Hingham when he refinanced this year. If any questions arise, he says, "we can walk in and talk to someone." Washington Federal Savings Bank, a 110-year-old thrift based in Washington, Pa., about 20 miles south of Pittsburgh, shunned subprime and other riskier types of mortgages, even though some of its loan officers grumbled that they were losing business to competitors. But at the end of April, Washington Federal's president, Brian J. Smith, could count on one hand the number of loans owned by his bank that were 30 days or more overdue: four. That equates to a delinquency rate of 0.21% of the dollar value of home mortgage loans. Many local banks don't have the capacity to hold loans on their books and so act as brokers. Taylor, Bean & Whitaker Mortgage Corp., a mortgage lender based in Ocala, Fla., has signed up more than 2,100 community banks to act as brokers for loans funded by Taylor Bean. Mark Hammond, who oversees Taylor Bean's dealings with community banks, says the company's mortgage lending generated in the first four months of this year was up 31% from a year earlier. "More and more [small] banks are learning that they can compete with mortgage brokers using our program," Mr. Hammond says. FHN sells mortgage business to MetLife Memphis Business Journal, 6-05 First Horizon National Corp. subsidiary First Tennessee Bank National Association is selling a portion of its residential mortgage origination and servicing business to MetLife. The bank is selling 230 retail and wholesale offices outside Tennessee as well as its loan origination and servicing platform to MetLife, the company said before markets opened Wednesday. MetLife has agreed to pay book value for the assets pending certain adjustments, although the sale price was not disclosed. The deal is expected to close in the third quarter. First Horizon will keep 21 mortgage offices in and around Tennessee and the employees. MetLife will get about $20 billion worth of first lien mortgage loans and agreed to a sub-servicing agreement for about $65 billion of the balance of First Horizon's first lien servicing portfolio. First Horizon plans to sell mortgage loans held in its warehouse in the normal course of business and expects that the warehouse will be reduced by more than 90 percent by the end of 2008. First Horizon says that assets in its mortgage banking segment should decline by at least $3 billion by year-end 2008. First Horizon expects to incur pre-tax charges totaling $50 million-$70 million over the remainder of 2008 as part of reducing its mortgage operation, the company said. Ratings & Dividend Changes - June On 6-03 Fox Pitt Upgraded FHN from In Line to Outperform. On 6-16 DA Davidson Downgraded EWBC from Buy to Neutral. On 6-25 Sterne Agee Initiated PRSP at Hold On 6-04 UCBH Holdings (UCBH) announced that it plans to raise $135 million in capital by selling new securities. The bank holding company plans to offer 135,000 non-cumulative perpetual convertible preferred shares to raise the money. UCBH said it will use the proceeds for general corporate purposes. On 6-16 UMPQ declared a dividend of $0.19/share payable on July 15, 2008 to shareholders of record as of June 30, 2008. Ratings & Dividend Changes - May On 5-07 Lehman Brothers Upgraded UB from Equal-Weight to Overweight. On 5-13 Keefe Bruyette Downgraded HBHC from Outperform to Market Perform. On 5-16 FTN Midwest Downgraded UBCH from Buy to Neutral. On 5-27 UCBH declared a dividend of $0.04/share payable on July 11, 2008, to common stockholders of record as of June 30, 2008. On 5-16 Merrill Lynch downgraded Regions Financial and KeyCorp to sell from neutral on fears of declining credit quality. Merrill trimmed its earnings estimates [this looks more like a price target] for Regions by $0.88 to $20.44 and by $0.93 to $24.16 for KeyCorp. Analyst Ed Najarian told investors in a research note that Merrill continues to expect large loan loss reserves at the nation's larger regional banks, but sees the potential for recovery in 2009. Merrill maintained its sell rating on other regional banks Wells Fargo, SunTrust Banks and Wachovia Corp. On 5-16 Janney Montgomery Scott downgraded Colonial BancGroup to "neutral" from "buy," saying the financial services company is being hurt by the recession in residential construction markets in Florida and metropolitan Atlanta. In the near term, credit trends suggests that things could get worse before they get better, Janney's analyst Kevin Reynolds said in a research note. A turnaround in the Florida market is expected no sooner than the first half of 2009, analyst James Schutz of Sterne Agee & Leach had said earlier. Shares of Colonial will likely remain under significant pressure until the credit quality metrics show substantial and sustained improvement, a situation that may take several quarters to materialize, Reynolds added. The brokerage said it would avoid purchasing Colonial shares despite what appears to be bargain pricing at current levels, recognizing the heightened level of risk and uncertainty surrounding an investment in Colonial in the current environment. Analyst Reynolds also reduced his 2008 earnings estimates of Colonial to 45 cents a share from 70 cents, citing higher share count resulting from a recent equity offering, in addition to higher provisioning levels over the balance of 2008. The brokerage said it cut its fair value estimate on the company's stock to $7 from $12 to reflect lower earnings estimates. On 5-13 HBHC declared a dividend of $0.24/share payable June 16, 2008, to shareholders of record as of June 5, 2008. On 5-13 PACW declared a dividend of $0.32/share payable on June 3, 2008, to shareholders of record at the close of business on May 27, 2008. On 5-14 FNB declared a dividend of $0.24/share payable on June 15, 2008, to shareholders of record as of the close of business on June 1, 2008. On 5-22 UB declared a dividend of $0.52/share to be paid on July 7, 2008, to shareholders of record as of June 6, 2008. On 5-28 WTNY declared a dividend $0.31/share payable on July 1, 2008 to shareholders of record as of June 16, 2008. Home Page Factoids Previous Update |