US Banks (2008)

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gyrfalcon
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Post by gyrfalcon »

mw wrote: If one must buy a financial company, now, and one hopes to get some capital lift from buying here lower due to recent selling then MFC might be a better choice. Latest dip included MFC (or even SLF) has certainly outperformed AIG over this decade.
I almost posted this text last night, but you have flushed me out. p. 31 from Q1 Presentation, viewed positively by me:

"Sub-Prime RMBS holdings of $584 million

Monoline insurance exposure limited to $922 million of wrapped bonds

No exposure to issues in Asset Backed Commercial Paper (ABCP)

No exposure to Special Investment Vehicles (SIVs)

No Synthetic Securitizations

We do not write credit derivatives".
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Post by mw »

gyrfalcon - thanks for bringing that up; my key question regarding their results is where their equity market exposure is centered. 2/3's of their equity exposure is in Asia (page 8 of the presentation).

I would have expected a little less risky betting. Instead they seem to be willing to bet the farm on emerging markets and a big recovery in Japan. Perhaps they know something, or perhaps their operations growth there has made them blind to other risks.

Looking deeper, their investment in Asian markets is completely out of step with where the bulk of their business comes from. Japan, Hong Kong, while growing, only represent a tiny fraction of their revenue base - yet their investments are completely lopsided there.

While there bets might pay off in the long run, given how volatile the Hang Seng can be, it still seems risky. I've assumed that other companies have similar exposure - the lure of China is awfully strong. My homework this weekend is to do an analysis of Asian markets to see where the trends are likely to head; knowing that would be a useful clue for determining direction for financial orgs with that exposure... for next quarter. In addition a stronger Canadian dollar (than even today, if it should come to pass) will also have an increased negative impact on Manulife.

Meanwhile Canada chugs along near a record high... (and its own set of issues and risks).


edit: Scotia Capital has this to say about them:
Volatility increases and earnings quality still difficult to decipher - CEO to step down. This, combined with the announcement that CEO D'Alessandro will step down May 2009, all suggests that MFC's valuation premium versus the group will more than likely continue to contract. Given potential management changes we expect no near term acquisition catalyst.

Source of Earnings Analysis suggests that outside of the negative impact of the equity markets, experience gains/assumption changes were exceptionally large, helping EPS more than normal, the extent to which may not necessarily be sustainable.
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gyrfalcon
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Post by gyrfalcon »

mw wrote:gyrfalcon - thanks for bringing that up; my key question regarding their results is where their equity market exposure is centered. 2/3's of their equity exposure is in Asia (page 8 of the presentation).

I would have expected a little less risky betting. Instead they seem to be willing to bet the farm on emerging markets and a big recovery in Japan. Perhaps they know something, or perhaps their operations growth there has made them blind to other risks.
mw, on p.8 you are not seeing $$$s invested, you are seeing the respective INDEX numbers themselves & Q1 declines in each. You should *know* MFC would never speculate like that. I'm confident their respective country equity exposures are almost exactly in line with respective country-based business volume & guarantees re:

Segregated Fund Guarantees
Equities supporting general account liabilities
Variable Life Reserves.

Other equity-based exposure comes directly from their cut on AUM.

We should also note that the above 3 are all accounting mark-to-market losses & will just as quickly be reversed & recorded as "income" when OR IF markets recover. As their business is rather longterm, this is likely a matter of time, even if measured in yrs. Will the market give them lots of slack for this ? Of course not. Also, these entries can continue in a negative direction. [But March 31 was surely a rather rough date to have to use, compared even to today. Markets need to return to March 31 values before further Q2 losses would be recorded on June 30th].

I believe Scotia & RBC both reduced target price by $1. gyr.
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Post by iluvnascar »

I have to admit that I bought several thousand shares of MFC on last week's selloff. I immediately sold July 36 calls on half the purchases - if exercised, I'll get an annualized yield a bit over 20% for the 71-day holding.

MFC is essentially my only financial holding although I've also been buying some Thomson Reuters which is a quasi-financial.
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Post by mw »

gyrfalcon - thanks for pointing that out. Mea culpa, apparently my brain was only barely warmed up when I looked at that page. I even remember at the time thinking that what I thought I was reading was insane given the nature of their business which should have caused me to take another look.

It certainly would be interesting to know what the equity and geographic mix is in their equity portfolio (28B$ of their 166B in assets).

MFC is certainly one target I'd like to pick up when it / the market stabilizes; the CEO departure is a potential slight negative in terms of multiples but who knows who they may recruit to replace him.

In the meantime I wonder if financials weakness will become self-reinforcing - market weakness begets financials weakness which begets more market weakness. At this point I would say that it is somewhat more likely than not that equity prices will not materially appreciate much from here; even if they do not appreciably weaken much from here (say hold the March lows) the quarter to quarter comparison for those investments won't add much cheer although the q to q comparison at least will appear to be stabilizing which should help support their valuation in that case.

Unfortunately, at this point in time as I look at the market, there is a somewhat greater chance of the market having made new significant lows during this quarter. which will make it hard to go long financials and keep them if the movement appears trending and not trend-bending.

However if the market could rather quickly regain last week's high and hold that I would certainly change my view for a time.
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Post by mw »

Former executive says AIG is in crisis
NEW YORK, May 12, 2008 (UPI via COMTEX) -- The head of American International Group"s largest shareholder group and former company chief executive Maurice Greenberg said AIG is in crisis.

In a letter filed with the U.S. Securities and Exchange Commission, Greenberg, who left AIG in 2005 during an investigation into the company"s accounting practices, asked that the insurer consider postponing its annual meeting, which is scheduled for Wednesday, The Wall Street Journal reported Monday.

The letter cites "a complete loss of credibility with the investment community," the Journal reported.
Former CEO's railing against current management is becoming something of a trend these days. (Think Jack Welch and GE) But they don't all launch lawsuits:

Greenberg Charity Sues AIG Over Credit Losses
Alyn Ackermann NEW YORK, May 12, 2008 (A. M. Best via COMTEX) -- A charity headed by the former chief executive of American International Group Inc. has sued AIG, claiming that his replacement as head of the giant insurer committed ?misrepresentations and omissions? in downplaying what would become ?multibillion losses in AIG?s portfolio of credit default swaps,? according to court documents.
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Post by mw »

MBIA, Ambac Mortgage Losses Elevate Concerns on Top Ratings, Moody's Says
MBIA Inc. and Ambac Financial Group Inc. had ``meaningfully'' higher losses on home-equity loans and collateralized debt obligations than anticipated, raising concern about their Aaa status, Moody's Investors Service said.

MBIA yesterday reported a $2.4 billion first-quarter loss, its third quarterly loss in a row. The company recorded $3.58 billion of charges on derivatives it uses to guarantee CDOs and other debt.

S&P yesterday said it remained ``circumspect about assigning stable outlooks to insurers'' because of ``the unprecedented level of mortgage market deterioration.''

Ambac posted a loss last month of $1.66 billion for the first quarter, also its third in a row. Ambac took $3.1 billion of charges for insurance on mortgage securities. The company set aside $1 billion during the first quarter to cover claims on second-lien mortgages. Ambac has insured bonds backed by closed- end second and home equity lines of credit of $16.4 billion, according to data on the company's Web site.
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YTD losses per employee

Post by kcowan »

1. Mizuho Financial Group - $5.5bn in writedowns / credit losses, 2,000 wholesale banking employees, $2,750,000 per employee.

2. Wachovia - $7bn, 3,900, $1,794,872 per employee

3. UBS - $37bn, 22,000, $1,681,818 per employee

4. Citi - $40.9bn, 30,000, $1,363,333 per employee

5. Bank of America - $14.8bn, 20,000, $740,000 per employee
Asset writedowns & credit losses YTD 2008

Three US banks in the top 5....
For the fun of it...Keith
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Post by mw »

Courtesy of Scotia Capital:
Meredith Whitney, an analyst from U.S. brokerage Oppenheimer has developed quite a reputation for her calls on the U.S. banks, which for the most part have been correct. This morning Bloomberg is reporting that Ms. Whitney believes the U.S. credit crisis will extend into and even beyond 2009 as banks will write off more than $170 billion of additional reserves by the end of next year. "the real harrowing days of the credit crisis are still in front of us and will prove more widespread in effect than anything yet see…just as strained liquidity pushed so many small and mid-sized specialty finance companies to beyond the brink, we believe it will do the same with the U.S. consumer." So far banks and securities firms worldwide have amassed about $380 billion of writedowns and credit losses.
AIG said it would raise even more than previously announced, up to 20$ billion.
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Post by mw »

Speaking of AIG, When Raising $20 Billion Scares People:
What American International Group Inc. did when it said it would raise $20 billion in capital was doubly surprising. For one, it’s raising more than was expected (an announced $12.5 billion, which already had made investors nervous), and secondly, it surprised the market by going ahead with this without informing the market in advance.

Shares reacted poorly, though, falling 2.2% after the company said it would raise an additional $7.5 billion using a mix of shares, equity-linked securities and fixed-income debt. It seems in some ways that AIG is trying to play a confidence game: The insurance behemoth’s earnings report, released May 9, revealed an increase in the company’s dividend by 10% while it announced that it needed more capital.
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Potential to head to 30 based on straight forward price range extension. Not a forecast, just a musing:

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Post by brad911 »

But AIG raised their dividend!!!!! :D...wait, $20B in new capital? :shock: :roll:
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Post by mw »

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J.P. Morgan analyst Vivek Juneja lowered C earning forecast for 2008 from $1.06 to $0.08 per share, and dropped 2009 expectations modestliy. The losses he says will be “driven primarily by residential real estate secured lending, auto, and credit cards in the near term.

One has to believe their dividend is toast.
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Post by Mike Schimek »

UBS

Yow, looks like they just de-valued their shares 33%.

Glad I'm not a shareholder.

:wink:

Mike
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Post by mw »

Its a wonderful time to be a bank shareholder isn't it?

After all if one is a holder of some of this toxic stew note only have your shares lost more than half their value already this past year (many approaching pre bull rally values), they are about to be diluted again and at a deep discount. What's truly amazing to me is that investors haven't started marching on bank HQ's with pitchforks but instead seem willing to forgive the troubles as one big "oops".
Swiss bank UBS launched a deep-discount rights issue worth 16 billion Swiss francs ($15.55 billion) on Thursday, saying it would issue new stock at 21 francs per share, about one-third below its latest market price.

The emergency offering, at 21 francs per share -- a whopping 73 percent below its peak price less than one year ago -- illustrates the extent of UBS's troubles after the world's largest wealth manager was forced to write down around $37 billion of assets hit by the U.S. subprime mortgage crisis.
A new bumper sticker will be in vogue: Bank shares party like its 2002!
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Post by JaydoubleU »

What amazes me is how the ex-CEOs of Citi and Meryll walked away with hundred-million dollar pay packages.

Just curious: others holding any BAC, C, WB, etc. are you holding, folding, or, (gulp) buying aggressively?
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Post by mw »

JPMorgan Swap Deals Spur Probe as Default Stalks Alabama County
Jefferson County -- which weathered the U.S. Civil War in the 1860s and racial strife in the 1960s -- is now scrambling to avert what would be the biggest municipal bankruptcy in the nation's history, measured by outstanding bonds.

JPMorgan, Bank of America, Bear Stearns, and Lehman Brothers Holdings Inc. charged Jefferson County about $50 million above prevailing prices for 11 of the interest-rate swaps the county bought between 2001 and 2004. None of the fees were disclosed to the commissioners, records show.

Porter, White & Co., the Birmingham-based financial advisory firm later hired by the county to analyze its swaps, said the banks raked in as much as $100 million in excessive fees on all 17 of its swaps.

On April 30, the SEC sued Larry Langford, the former county commission president and now Birmingham's mayor, for fraud in allegedly accepting $156,000 from a local banker while refinancing the sewer debt. Langford denies any wrongdoing. JPMorgan spokesman Brian Marchiony declined to comment for this article.

The Federal Bureau of Investigation has raided financial advisers in California, Minnesota and Pennsylvania to get files. In January 2007, Charlotte, North Carolina-based Bank of America Corp. agreed to cooperate with federal prosecutors in exchange for leniency. Bank of America spokeswoman Shirley Norton declined to comment.
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Post by adrian2 »

A balanced article from The Economist: Barbarians at the vault - here are the introduction and the end of it:
Modern finance is under attack. Yet the banking system has done much better than it is given credit for

BANKS have endured a brutal nine months since credit markets froze in August. Losses and write-downs already total $335 billion; many of their best businesses have disappeared. In developed economies, almost all banks are facing economic and regulatory headwinds that will cut revenues and jobs. Yet the biggest danger facing Western finance is not a fall in its earning power but a loss of faith in how it works.

Two criticisms assail the industry, one based on fairness and the other on efficiency. The first argues that finance is rigged to enrich bankers, rather than their customers, shareholders or the economy at large. Some worry about the way bonuses are calculated; others about moral hazard. Bankers will take wild bets because they know they will be bailed out by the taxpayer. Look at Bear Stearns or Northern Rock.

The second, deeper question is whether a market-based approach to finance is efficient. Some Chinese officials claim the Western system has been shown up by the crisis (see article). This week Germany's president demanded that the “monster” of financial markets “be put back in its place”: bankers had caused a “massive destruction of assets”. The critics do not lack ammunition. The lapses in credit-underwriting in the subprime-mortgage market hardly reflect a wise allocation of capital. The opacity of the shadow banking system and the mind-boggling complexity of those toxic asset-backed products have raised doubts about the discipline of the market.
Rome or the barbarians: your choice

As this week's special report on international banking makes clear, the main structural causes of trouble—the collective misjudgment of risk; a zealous search for yield; and the failure of oversight—are deep-seated. In financial history they crop up time after time. Financiers are rightly rewarded for taking risks, which by their nature cannot be entirely managed away or anticipated. The tendency for success to breed complacency and recklessness is as ingrained in financial markets as it is in any other walk of life. However bankers are paid, they cannot just sit out a credit boom; they have to keep dancing. Regulators lack the knowledge, the clout (and often the talent) to keep up with the banks' next brilliant scheme.

That reads like an indictment, until you consider the alternatives. Western finance, to paraphrase Churchill, is the worst way to allocate capital, except for all those other forms. It is obviously better than the waste and dysfunction in China, where centrally planned capital is dished out to the well-connected. But it is also better than the financial system the West used to have. Thanks to the astonishing innovation of the past few decades, derivatives can help firms and investors to hedge risks (there are plenty of Chinese manufacturers who would be grateful for an easy way to soften the impact of exchange-rate shifts). Securitisation widens access to capital for borrowers and to assets for investors: it can finance everything from water utilities to film studios. Leverage brings more lazy companies within reach of determined investors and more homes within reach of poorer consumers.

It is true that financiers have enjoyed vast profits—and the vast salaries that go along with them (pay at American investment banks has been nearly ten times the national average). But the collapse of the credit bubble will bring that down. And despite all the disasters, there are signs of finance's resilience. In the past few months the banks have commanded enough confidence to raise $200 billion in new capital from investors. Bear Stearns and Northern Rock were calamities, but rare ones, because the vast overall losses were spread far and wide. This time, there has been no industry-wide government recapitalisation. After 20 years of growth, the flaws of modern finance are painfully clear. Do not forget its strengths.
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Post by Sensei »

Hi,

As mentioned upthread, I'm staying with a hold on BAC. I think it's an excellent business and even if they cut the dividend, investors will be rewarded further on down the road. On the other hand, I'm not buying any more for now. I think the dividend for June is a lock, but after that, not sure. Prepared for the cut, but hoping it won't be too big, or not at all.

I also own some USB.

I've changed my watchlist slightly:

Synovus
Wells

Europe:
Allied Irish
Lloyd's (cut Barclay's)

Obviously caution is in order and try to catch some of the stocks near the bottom but also when we can be sure the sub-prime mess is unmessing itself.

Cheers
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Post by mw »

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A narrowing of the spread between U.S. and Canadian financials. Whether they'll continue to narrow through mutual declines or mutual advances is anyone's guess but that spread is likely to close.
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Post by JaydoubleU »

The widening of spreads merely reflects the fact that Canadian banks have largely side-stepped the sub-prime fiasco that is devastating US banks. Writedowns at Canadian banks have been minimal, fractions of those at Citi or Meryll. US banks like Citi are looking to sell off assets, while Canadian banks are making acquisitions.

If anything the spread should widen.
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Post by Operabob »

Just curious: others holding any BAC, C, WB, etc. are you holding, folding, or, (gulp) buying aggressively?
Just started a BAC DRIP.

OB
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Post by mw »

While I'm not expecting a dramatic closing of the gap, I think the spread will contract some of the distance (US rising perhaps) and eventually the two will trade in tandem (spread or not) lower as business conditions worsen.

Certainly I would expect a premium to be paid for the Canadian banks as they are different animals. From a raw percentage basis based on a point in time measurement (say from a new position started) the difference/spread may end up being negligible.

If the economy is receding or contracting, all boats sink. If housing starts getting impacted to the same degree as in various U.S. markets, our boats will spring a leak too.

At minimum I would expect them to trade sideways for a while, reflecting diminished growth expectations.
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Post by kcowan »

Canadian Banks
- mortgage originations down
- credit card profits sold off
- trading volumes down

What will happen to
- consumer loans?
- banking fees?
- investment banking deals (e.g. TD and BCE)?
- foreign exchange fees?
- other sources of growth?
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Post by carnet »

It probably also doesn't hurt that the Canadian Banks are an oligopoly.
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Post by mw »

Betting on the Canadian banks right at this very moment in time is betting on the real economy in Canada as well as the market.

Housing: what will be the impact here from the housing deflation wave sweeping the US? Several are big broker dealers, so they have exposure there as well. Will inflation be an issue for Canada? Rising rates are an issue for the banks as well.

Plus its not clear that the US bank issues are over and their overhang will indeed weigh on bank investor/trader emotions. My US bank shorts continue to perform and I'm watching even now as the sector completely reversed all the gains from this morning and has made a new multi day low. Stay tuned.
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