The Bankwatch

RBS, the third largest bank in the world is expected to report a loss of nearly $4 bn today.

ITN – City braced for RBS results

The Royal Bank of Scotland is reportedly set to release the worst figures in UK banking history.
…

RBS, which owns NatWest, recently raised £12 billion from a rights
issue and is aiming to raise £950 million through the sale of its stake
in Tesco Personal Finance to the supermarket giant to shore up its
battered balance sheet.

As the IndyMac failure is taken care of, attention is turning to the next round, and the focus is squarely on the smaller regional US banks. The good news is that this is not expected to be as bad as the rates of failure that occurred in the late 80′s early 90′s and that is based on the record of non-performing loans at Banks. Currently there are 90 Banks noted in the ‘problem’ category.

The key will be the strength of the economy, maintenance of employment levels, and continued ability to maintain debt payments.

FT.com / Companies / Financial services – Failure raises concern for regional banks

Analysts also have drawn up possible “who’s next” lists. Richard Bove, a banking analyst at Ladenburg Thalmann, said one way to determine which banks were most vulnerable was to look at the non-performing assets of an institution – including loans that are 90 or more days past due – and divide them by outstanding loans.

A ratio above 5 per cent suggests danger, and seven banks – including IndyMac – fell into this category, according to his analysis. But Mr Bove said that the system is “not anywhere near the danger” that existed during the savings and loans crisis in the late 1980s and 1990s.

Indeed, many experts have dismissed comparisons with that period when more than 1,000 institutions failed. The present number of so-called “problem” banks, which rose from 76 to 90 in the first quarter, is well below the record levels seen during the former crisis when one in 10 banks was in that category.

But regulators and analysts do expect more bank failures. John Bovenzi, chief operating officer of the ­Federal Deposit Insurance Corporation, said: “I don’t expect there will be large bank failures. There will be small bank failures.”

FDIC predicts more Bank failures in the US.

FT.com / In depth – US banks likely to fail as bad loans soar

Meanwhile, the FDIC said the number of “problem” banks rose in the first quarter from 76 to 90, with combined assets of $26.3bn. Three US banks have failed this year, compared with three for the whole of last year and none in 2005 and 2006.

Ms Bair said she expected more bank failures but emphasised that the number of problem institutions remained well below the record levels of the savings and loan crisis of the 1980s and 1990s – when one in 10 banks were in that category.

UPDATE: July 15th, 2008

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Wall Street stocks slumped for a third straight session on Tuesday morning as investors remained nervous about the health of financials after the worst sector sell-off since the start of the credit crisis.

Financials came under particular pressure after a number of analyst downgrades, a banking-led sell-off in European and Asian markets and some poor results.

Meredith Whitney, an analyst at Oppenheimer, downgraded Wachovia from “perform” to “underperform” despite an already dramatic share price decline and the fact that the company trades at below tangible book value.

Ms Whitney slashed her full year 2008 and 2009 estimates and warned that the outlook for equity shareholders was “bleak”, capital was a real concern “given the stark disparity in underwriting assumptions between Wachovia and its peers and Wachovia and actual home price declines”

Ms Whitney was equally downbeat on the outlook for the broader market, suggesting that bank stocks were headed lower until banks addressed true asset values and adjusted their books accordingly.

“The fact that all banks under our coverage have unrealistic house price appreciation assumptions will in our opinion lead to a material and protracted writedown and capital pressure,” Ms Whitney said.

On Monday equity markets chose to discount a series of extraordinary measures to rescue the mortgage giants, Fannie Mae and Freddie Mac.

Instead investors focused on the collapse of Indymac Bank – the third biggest bank failure in US history – and its implications for the troubled regional banking sector.

A slew of regional banks lost more than 15 per cent of their share value and 15 of the 89 companies in the S&P 500 financials sector fell more than 10 per cent. The sector as a whole fell 6.1 per cent.

In early trade on Tuesday, Wachovia fell 16 per cent to $8.27. Fifth Third slipped 10.1 per cent to $9.95, Regions Financial gave up 8.6 per cent to $6.51 while National City fell 15.1 per cent to $3.20.

Fannie Mae and Freddie Mac fell back again as investors worried that the Treasury’s rescue plan would benefit bondholders but do little to prevent further dilution. The pair slumped 16.6 per cent to $8.11 and 24.3 per cent to $5.38.

Meanwhile, US Bancorp posted a larger-than-expected decline in quarterly profit due to rising credit losses and said that tough economic conditions would lead to more bad loans.

US Bancorp fell 6.6 per cent to $21.80 while the financial sector as a whole dropped 3.8 per cent.

Analysts at Barclays Capital said: “The likely need for additional capital to replace expected future losses is putting significant pressure on bank equities broadly. . . In many cases, the equities are down 40-60 per cent over the prior three months. This amounts to a shadow run on several banks.”

There were some brighter spots. Washington Mutual shares rallied 8.1 per cent to $3.49 after it said it was “well capitalised.”

State Street, the world’s largest mutual fund servicing business, also made ground after second-quarter earnings rose 50 per cent to $548m as lower interest boosted investment returns. Revenue jumped 39 per cent to $2.67bn.

State Street shares rose 1.6 per cent to $56.59 although they have lost about 25 per cent of their value over the past six months on concerns that future earnings will be hit by losses on mortgage-backed securities and turbulent financial markets.

Nine of the 10 leading industry groups fell in early trading, knocking the benchmark S&P 500 down 1.2 per cent to 1,213.14 points – its lowest level since October 2005.

The Dow Jones Industrial Average dropped 1.2 per cent to 10,927.85 points and a two year low while the Nasdaq Composite lost 0.9 per cent to 2,192.08 points.

Crude oil rose in early trading, keeping up the pressure on consumer facing and energy dependent stocks, while data from the Commerce Department showing that retail sales barely budged in June despite the tailwind of massive government rebate stimulus.

The consumer discretionary and staples sectors lost 1.7 per cent and 0.8 per cent led down by the likes of Macy’s and Wal-Mart Stores which fell 5.6 per cent to $15.37 and 0.9 per cent to $55.80 respectively.

Meanwhile, new data from the Labor Department showed that the cost of raw materials for producers continues to rise although core inflation, which excludes volatile food and fuel, moderated somewhat in June.

Such costs are clearly taking their toll. Overnight, Kimberly-Clark issued a profit warning blaming rising energy and distribution costs. The shares fell 7 per cent to $54.70.

Eaton, the diversified engineering company, also declined 11.7 per cent to $70.56 – the most in eight years – after the company said 2008 profit would be lower than it previously projected because of rising oil prices.

The news, and a survey of manufacturing in New York State which showed a third consecutive month of contraction, dragged the industrials sector down 2.4 per cent in early trading.

Markets may take some direction from Ben Bernanke, the Federal Reserve Chairman, who gives the semi-annual Humphrey-Hawkins testimony before the Senate on Tuesday.

Analysts expect the Monetary Policy Report to update the quarterly economic projections of the Federal Open Market Committee and agree that he faces a difficult task: balancing the demands of a weak economy, re-emerging financial market turmoil and inflation risks.

By mid-morning, the healthcare sector was the only one to trade in positive territory, climbing 0.7 per cent thanks to some decent earnings news.

In the first of what I expect we will see more of, HSBC directors are attacking the bonuses of senior executive. The general thinking with regard to bonuses, especially those in investment banking, is that they are so large, you would have to be crazy not to take excessive risks.

FT.com / Companies / Financial services – Showdown looms over HSBC bonuses

Directors at HSBC are heading for a potentially bitter showdown with shareholders over a remuneration package that could reward the bank’s most senior executives with more than £100m over the next three years.

The scheme, made up of generous annual bonuses and long-term incentives, could see a number of directors receiving up to 12 times their basic salary each year for the next three years.

There is a trend in US and UK towards reater transparency on overdraft fees. One of the dirty secrets in banking, is the ability to charge enormous fees in addition to overdraft interest. This practise worked because people preferred to pay the fee, rather than the embarrassment of bounced cheques.

The notion that [some] people warrant help from their bank, has been lost in favour of a one size fits all fee approach, and now that is in question.

Payments News: How to Comment on the Fed’s Proposed Credit Card Rule Changes – May 02, 2008

In addition, the proposed rules addresses practices in connection with a bank’s payment of overdrafts on a deposit account, whether the overdraft is created by check, a withdrawal at an ATM, a debit card purchase, or other transactions. The proposed rules require institutions to provide consumers with notice and an opportunity to opt out of the payment of overdrafts, before any overdraft fees or charges may be imposed on consumers’ accounts.

Aside from the press release that I just shot down in flames, I have to say the 92 page document behind the release is quite a different story and clearly worth the read, something I will do tomorrow. Its just very annoying when PR departments try to take one thing, and make it something else.

The report is very detailed, and contains clear comparisons between the Canadian Banks, winners and losers. This will support another post later.

Canadian Banks 2008: Perspectives on the Canadian banking industry

This publication provides an analysis of the 2007 financial results for the Canadian banking industry. In addition, it examines the challenges that lie ahead: how can banks be part of a sustainable future, how can they attract and retain the best talent, and how can they streamline the regulatory burden? It also addresses the demographic and regulatory changes that will affect the bottom line not just in 2008, but in the years to come.

I hate these kinds of press releases, and PWC should really think carefully about it. Its a classic example of wanting to say something (pro mergers) and taking any fact that comes along and using it to support what they wanted to say anyway.

CNW Group | PRICEWATERHOUSECOOPERS | Canadian banks manage 2.2% growth in 2007 – real test is on its way

… net income was CDN$19.5 billion – a small increase in year-over-year growth of just 2.2%, compared to a record-breaking 50% increase in the previous year.

…. ….

“The growing size gap between Canadian and global banks is making it increasingly difficult for Canadian banks to compete,” says Chant. “Large global banks have far more resources for product development, systems development and acquisitions than their Canadian counterparts. It’s critical that Canadian banks become more focused and invest in a few, carefully chosen areas.”

Canadian Banks are sufferring a lack of profits because of losses in the mortgage and capital markets. This is a reflection on management not on size. Had they merged they would merely have been bigger, and lost more.

Come on PWC …. think before you issue stupid press releases. Mergers are needed to support competitiveness in a global context for increased profits, but the reason for reduced profits in 2008 is bad decisions.

I think I can officially cease posts on the credit crisis …. its finally official that the impact is far reaching into all aspects of the worlds economies.  Back to normal programming for me. 

FT.com / Columnists / John Authers – The Short View: US recession

Now we have clarity. Last week’s awful employment data from the US ended all arguments about whether the US is heading for a recession: it is already in one. Now we need only argue about its severity and its duration

In the first of what is expected to be a series of suits, here is a pension fund going after Banks who feel that their investments have been compromised by failure to prevent mortgage related losses.

FT.com / In depth – Investor group attacks banks over subprime

Union-backed CtW Investment Group, whose affiliated pension funds have over $200bn (£99.5bn) under management, is expected to launch its first attack on Morgan Stanley, and follow up with campaigns against some of the banks with the largest subprime-related writedowns, including Citigroup, Merrill Lynch, Bank of America, Washington Mutual and Wachovia

With these two quotes taken from various press, and summarised on the always complete Canadian Banks blog, it is clear we are entering a period of signficant mistrust amongst at least two of the Banks.

Canadian Banks & Insurance Blog

Canadian Imperial Bank of Commerce is putting its stock — and the fortunes of its shareholders — at the mercy of hedge funds and other sophisticated players because of the piecemeal way the bank is disclosing its exposure to investments in U.S. subprime mortgages and other complex securities, says a Bay Street analyst.

Also not fully explained yesterday was how CIBC, whose mantra for the past couple of years has been to de-risk the bank, got enmeshed in a variety of U.S. businesses that some other financial institutions avoided. In short, what was the culture of an organization that believed it could be an active participant in a U.Smarket with some of the smarter and major U.S. players? A partial explanation was that CIBC was in the structured-credit business, a business it deemed to be “low-risk” — while some of the others weren’t.

Canadian Banks & Insurance Blog

This announcement does not give us comfort that the headline risks that plague BMO are behind it, as we believe the bank is still exposed to more writedowns and many questions remain unanswered. Outside of these headline risks, the bank is weaker than its peers in retail banking, has more exposure to low multiple wholesale earnings, and more exposure to potential calls on liquidity if the financial services system sees more liquidity contraction.

At the core of these three points, is the earlier promise and history of risk avoidance that has now turned into an apparent willingness to take extreme risks beyond that which other Banks have done. Banks have a history of risk management, and the central tenet of risk management is to not take unnecessary risk. Presumably these risks have been taken to buoy earnings that may have been otherwise lagging in traditional bank products, but those decisions do not look so good now.

There is also the point, that some of those trusts have funds invested by some of the wealthiest Canadians, and they would not be happy to lose their investment, so to a certain extent, these Banks are caught in a classic trap of whether to satisfy analysts / markets, or customers.

The good news is that Canadian Banks are generally well capitalised, and will weather the storm over time with some careful stick handling.