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US banks likely to fail as bad loans soar | ft.com

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

US stocks slump as fears over banks deepen

By Jeremy Lemer in New York

Financial Times
http://www.ft.com/cms/s/0/4b08e978-526e-11dd-9ba7-000077b07658.html

Published: July 15 2008 14:18 | Last updated: July 15 2008 15:49

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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.

Written by Colin Henderson

May 29, 2008 at 20:20

Posted in Profitability

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