Nearly every major commercial bank has reported earnings over the last week. The results have ranged from an $8.8 billion dollar loss at Wachovia (WB) to a $3.4 billion dollar profit at Bank of America (BAC). The bank’s capital ratios have stayed adequate for the most part, even if it has meant changing the charge off procedure, as in the case of Wells Fargo (WFG). The perceived improvement, or for that matter the perception that the loses have peaked, has caused one of the greatest short-term rallies in the history of financial stocks. Yet, I still worry that the hardships facing the commercial banks are nowhere near complete and as a result the current rally will prove to be merely a painful remainder of how much further the bank stocks have to fall to account for the near continuous addition of delinquent loans to their books.
I strongly believe that the amount of loans that are between 30 and 89 days delinquent are a great indicator of future issues in any banks’ loan portfolio. Unfortunately, these figures are never included in the bank’s quarterly press release and are rarely included in the banks’ 10-Qs. As a result, individual investors must search out the call reports put out by the FFIEC, these reports can be found here. it should be noted that these reports show the health of the bank only and not the holding company. These reports are tremendously detailed and allow for a much more detailed examination of any banks books. The one drawback however is that the banks typically take over a month to file the reports; as a result, investor’s are left in the dark in the time period immediately following the standard quarterly release. For long term investors I believe that it is imperative that one waits until the call reports are filed with FFIEC in early to mid August before taking a position in any bank as we will then be able to see the trouble that the banks have gotten themselves into over the summer. As of 3/31/08 the following major banks had a substantial number of loans that were 30-89 days delinquent:
Wachovia (WB): In excess of 5.3 billion
Washington Mutual (WM): In excess of 5.2 billion
Wells Fargo (WFC): In excess of 5.4 billion
Bank of America (BAC): In excess of 8.3 billion
JPMorgan Chase (JPM): In excess of 6.9 billion
U.S. Bank (USB): In excess of 1.3 billion
Citigroup (C): In excess of 13 billion
These figures should remind us that there are still considerable losses in the pipeline, on top of those loans that will become delinquent in the second quarter. As banks do not have to start reserving for loses in these loans until after 90 days it is possible that the worst is yet to come for these banks, especially if a significant number of loans become delinquent over the summer. Generally speaking these loans do not start to bring about a deterioration in the capital base and capital ratio of banks until after 90 days. The possibility of increased delinquencies and the potential capital raises that could follow is why I would advise waiting until the second quarter call reports come out in mid August before investing in any bank stock. I have talked a little bit about how these early delinquencies can be included in calculations to figure out the strength of a particular bank here, I believe my article on a potential “California Ratio” is worth a review going into the release of the second quarter call reports. Especially if one is considering taking a long term position in one of our country’s many regional and national banks.
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Disclosure: None
4 comments:
You probably know this already, but some banks do release these numbers on a monthly basis. Yesterday's squeeze in First Fed seems to have been precipitated by such a release.
It was bizarre because when I looked at the numbers in the release I saw nothing impressive. Other than showing they'd be a going concern for another quarter or two, there was nothing in there to make me want to cover. And sure enough today, it is selling off hard. I reckon that's the problem with crowded shorts... and why I only buy long-dated puts.
BTW, really enjoy your stuff. I see you don't get too many comments, but I'm a regular reader and like/share your intrinsic value style of investing.
Best wishes.
Hi Allan, congratulations on your position. You are right about FED, it's SEC filing left nothing to be impressed with, the bank is clearly troubled. Thanks for reading my blog and feel free to keep letting me know about items I may have missed!
Howdy,
Another vicious squeeze in First Fed based on their monthly consolidated operations report.
In retrospect given Downey was able to stop the growth in their NPAs in July, it stands to reason Fed would be able to do the same or better. But again, this report is not a unqualified success that one might presume looking at the stock quote.
1) Retail deposits dropped $257M or about 8% to $2.9B. They pretty clearly worked hard to offset that loss by almost doubling their brokered deposits (AKA fast money) with a $556M increase to $1.2B. This accounted for some of their asset growth, but note despite a $265M net increase in deposits, their assets grew $251M. So it seems $14M of those new deposits "left the building" as losses. Yes?
2) Headline NPAs dropped from 8.2% to 7.56%. Except... their asset base increased by $251M. In absolute terms, NPAs dropped $27M and would have been 7.8% using June's asset balance as denominator. And this is where my understanding of bank accounting gets a little uncertain, but is half of the drop in NPA accounted for by them realizing losses on their REO... ie the missing $14M from point 1?
3) Their delinquency roll rates aren't exactly improving. There was a modest $3M (2.5%) drop in the 30-60 days, but a huge $20M (25%) increase in 60-90 days. I don't see this as being indicative of them being out of the woods at all.
Criticism of the above analysis is welcomed.
Allan, I agree with you the short thesis on FirstFed is intact. I'm planning an article on it later this week so stay tuned.
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