Who’s Next? Downey, National City, BankUnited, Washington Mutual in the cross hairs
- 14.07.2008
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The big question after IndyMac (and Fannie and Freddie for that matter) is who’s next in the great bank failure flameout of 2008? There’s plenty to speculate and the stock market is putting the hurt on those that look like the weaklings of the pack. The biggest ones hurting? Regional banks who bet big on mortgages and don’t have the massive capital reserves (or ability to raise it quickly).
How do you know who’s in trouble? Taking a look at banks that bet big on Option ARM, negative amortization mortgages who carry a light balance sheet is a great place to start. National City, who was big in to subprime lending before spinning out of it is also on the hook although seems to be better positioned than others on the ailing list.
From Bloomberg on the sell-off of Washington Mutual and National City stock today:
Washington Mutual Inc., the biggest U.S. savings and loan, and National City Corp., Ohio’s largest bank, led the steepest decline in bank stocks in almost two decades after IndyMac Bancorp Inc.’s collapse spurred concern more lenders are vulnerable to bad home loans.
WaMu slid $1.30, or 30 percent, to $3.45 at 12:59 p.m., and National City dropped $1.11, or 25 percent, to $3.31 in New York Stock Exchange composite trading. First Horizon National Corp., Tennessee’s largest bank, declined 22 percent, while Regions Financial Corp., Alabama’s biggest, fell 14 percent.
“IndyMac’s failure has people worried about others,” said Mark Fitzgibbon, a principal at Sandler O’Neill & Partners LP. “The mindset is throw the baby out with the bathwater.”
And from the Wall Street Journal:
It’s another terrible day for the regional banks. Poor earnings from M&T Bank sent shares of that company down sharply Monday, and just about 20 minutes ago, shares of Cleveland-based National City Corp. were halted at $3.21 a share, down 27%, “pending news.”
It turns out, though, that National City’s “news” is merely a quick statement to respond to “market rumors” that they “ and others “ believe has hurt their stock, just the latest banking company to finger market chatter for the reasons behind stock-market declines. The text of the statement suggests that the bank is worried about talk of John Q. Public going to their nearest branch and pulling their deposits.
“National City is experiencing no unusual depositor or creditor activity. As of the close of Friday’s business, the bank maintained more than $12 billion of excess short-term liquidity,” the bank said. “Further, as a result of our recent $7 billion capital raise, National City maintains one of the highest Tier I regulatory capital ratios among large banks.”
And finally from CNBC:
Richard Bove at Ladenburg Thalmann has a different take on who may be next. In a report, he looks at all the FDIC-backed institutions, comparing each bank’s bad loans to its overall assets through two ratios. First, he divides the “non-performing assets” of an institution–bad loans, late loans, foreclosed assets–by all of its outstanding loans. “A radio above 5 percent suggests danger.” The overall industry ratio is below 2 percent. That’s good news. But it’s not so good for individual names like Downey Financial, with a 13.86 percent ratio (on Sunday, Downey Financial reported its non-performing assets were over 14 percent, up from 1 percent a year ago). Other names in the “danger zone” are Corus Bankshares
at 13.18 percent, Doral Financial at 12.82 percent, FirstFed Financial at 6.73 percent, Oriental Financial
at 6.12 percent, and BankUnited Financialat 5.36 percent.
Then Bove ran a second set of numbers dividing a bank’s non-performing assets by its reserves plus common equity. “A ratio about 40 percent is the danger zone.” This is where it gets interesting. You have all the same names as listed before, PLUS WASHINGTON MUTUAL, which comes in with a ratio at 40.6 percent. Bove calls this being “on the edge” of danger but not quite there yet.
