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An end in sight?
It seems like it will never end. The situation in the banking industry just keeps getting worse. No matter how often pundits and prognosticators declare the bottom, the news keeps getting worse and the stocks continue to decline. Bank Indexes fell as much as 10% on Monday amidst the troubles at Fannie and Freddie. We have even had the first run on the bank in the US in decades as depositors clamored to withdrawal their money from IndyMac bank. The FDIC seized Indymac this week, marking the largest bank failure since Continental Illinois in 1984.
This morning we have even more bad news. Citigroup CFO Gary Chittenden lay to rest any talk of a near term turnaround for Citi. He told investors today that it will be two to three years for the impact of asset sales to make a difference. It will be at least that long, he said, before earnings begin to improve in any significant manner. He added that the turnaround would be a marathon, not s sprint. Citigroup is expected to report a $3billion dollar loss for the second quarter adding to its impressive streak of losses in the last year. The bank has lost $46 billion since the crisis began last August and has raised a staggering $40 billion of new capital to keep the doors open. There are concerns about Citigroup's ability to continue raising the capital it needs since those who put money into the bank in the first go round have lost as much as 505 on their capital.
Click here to find out who else is in trouble and what the future holds...
Wachovia is under fire as well. Meredith Whitney of Oppenheimer, the analyst who has been the most negative, and therefore the most correct, downgraded the shares again on Tuesday. She thinks the mortgage portfolio will continue to lose money and threaten Wachovia's ability to generate profits. She thinks that the scenario of declining assets and rising losses may threaten the banks ability to recover form the credit turmoil. Wachovia shares are down over 80% in the last 52 weeks and trade well below $10 after trading above $50 just last year.
Rating agency Standard and Poors got in the act as well. The agency lowered its outlook for regional banks on Monday. They believe that credit quality continues to decline and banks will have to increase loan loss provisions in 2009 and 2010 far more than originally believed. Loans to developers are one of the areas S&P highlighted as those loans are dependent on a real estate market recovery to remain performing. They fell many of the regional's will have to raise capital in the form of common and preferred stock offerings that will be dilutive to current shareholders. It is also highly likely that will be more dividend cuts amongst the group this year.
We are staring to see some signs of the baby going out with the bathwater right now. All bank stocks are falling. Many of the nation's banks are struggling on the current environment but will be just fine in the long run. I am now staring to see banks with healthy capital ratios that re profitable trade well below book value. My two local favorites Severn savings and Annapolis Bancorp have continued to decline and are cheap. I still think Sovereign bank is going to survive and the stock is finally below tangible book value. I am not quite ready to put on the puke trade (where you have to stop and vomit two or three times before just loading up on stocks) but it is getting closer. I would focus on the highest quality balance sheets with equity to asset ratios over 10 and capital ratios at least twice the minimum for being categorized as well capitalized. I also would not even consider paying over tangible book value. Check loan loss ratios carefully and avoid those with heavy exposure to development loans.
Earnings season is upon us and many banks, both large and regional are going to disappoint investors once again. The stock declines as a result of this continuing bad news may give long term investors a chance to buy quality small banks at a discount. I caution that this will take a while to yield profits and the stocks are probably going to go down before they go up. But five years from now, these prices may well seem to be the bargain and investment of a lifetime.
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