Winehole23
07-02-2009, 11:26 PM
Crisis Won’t End Until Balance Sheets Get Real (http://www.bloomberg.com/apps/news?pid=20601039&sid=azsX7o.atu7U)
(http://javascript%3Cb%3E%3C/b%3E:togShareLinks%28%27shr_v%27%29;)
Commentary by Jonathan Weil
July 2 (Bloomberg) -- Investors are feeling better about financial companies’ balance sheets than they were a few months ago. That’s not to say they have a lot of confidence in them.
Compare, for example, the stock-market value of Regions Financial Corp. with the bank’s reported net worth (http://www.bloomberg.com/apps/quote?ticker=RF%3AUS). At $3.97, the Birmingham, Alabama-based company’s stock is up 69 percent since its February low, giving Regions a $4.5 billion market capitalization. That’s still only a third of the $13.5 billion book value it showed as of March 31. In the market’s view, the bank’s asset values remain grossly overstated.
The same story is playing out across the financial-services industry. Financial stocks in the Standard & Poor’s 500 Index (http://www.bloomberg.com/apps/quote?ticker=SPX%3AIND) rocketed 35 percent during the second quarter, fueling the index’s biggest quarterly advance since 1998. Yet for hundreds of U.S. banks and insurance companies, a vast credibility gap remains when it comes to their accounts.
As of June 30, there were 336 U.S.-listed financial companies trading for less than 60 percent of their book value, including Citigroup Inc. (http://www.bloomberg.com/apps/quote?ticker=C%3AUS), SunTrust Banks Inc. (http://www.bloomberg.com/apps/quote?ticker=STI%3AUS) and Marshall & Ilsley Corp. (http://www.bloomberg.com/apps/quote?ticker=MI%3AUS) Together, they had a stock-market value of $233.1 billion, compared with $463.1 billion of book value, or common shareholder equity, according to data compiled by Bloomberg.
When I ran the same stock screen for a column about this same time last year, it turned up 168 companies with a combined $120.3 billion market value and a book value of $270.3 billion. The way the credit crunch was playing out then, market declines were begetting writedowns, leading to more market declines and then more writedowns, and so on. That downward cycle finally has been broken, only nobody knows what will come next.
Pressure on Management
Often when companies see their shares trading at large discounts to the net asset values on their books, their managers will feel pressure to take big writedowns and corresponding charges to earnings, especially for intangible assets such as goodwill leftover from past acquisition sprees.
These are strange times, though. After peaking during the fourth quarter of 2008, writedowns and credit losses at U.S. financial companies fell more than half to $101.8 billion in the first quarter, according to Bloomberg data. That was when financial stocks generally were at or near their lows (http://www.bloomberg.com/apps/quote?ticker=BKX%3AIND).
Bank managers may not be any more inclined to cleanse their books now than they were then. Prices and liquidity have improved for many of the mortgage-backed bonds that helped spur the global financial crisis. Loans generally don’t have to be marked down to market values anyway, under the accounting rules.
What’s worrisome about the financial sector’s rally is that it has been government-induced. So far this year, the Federal Reserve has printed lots of money, hyped stress tests for large banks that were hardly stressful, and made clear it won’t let big institutions such as Citigroup die.
‘Green Shoots’
The Treasury Department promised subsidies for buyers of banks’ toxic debt securities, a program now having trouble getting started.
Banks and insurers got Congress to browbeat the Financial Accounting Standards Board into making rule changes that will let them plump earnings and regulatory capital. There also was Fed Chairman Ben Bernanke (http://search.bloomberg.com/search?q=Ben+Bernanke&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1)’s line in March about “green shoots,” which sparked a media epidemic of alleged sightings.
For all this, we still have hundreds of financial companies trading as though the worst of their losses are still to come. Just imagine what their prognosis might be if the government hadn’t pulled out all the stops.
Hidden Losses
Meanwhile, housing prices (http://www.bloomberg.com/apps/quote?ticker=SPCS20%3AIND) keep falling. Bank regulators this week said delinquency rates on prime home mortgages more than doubled in the first quarter to 2.9 percent of such loans, up from 1.1 percent a year earlier. The peak of the interest- rate resets on adjustable-rate mortgages won’t hit until 2011, according to analysts at Credit Suisse Group AG. And while there’s a meltdown in commercial real estate, hardly any of the credit losses have shown up on lenders’ financial statements.
Many of the largest banks and insurance companies have taken advantage of the run-up in their stock prices to raise badly needed common equity, including Regions, which had a $1.6 billion stock sale in May. (Its books still show $5.6 billion of goodwill, about $1 billion more than Regions’ market cap.) Most distressed financial companies, however, have been shut out of the capital markets and face dim takeover prospects.
To name a few, Colonial BancGroup Inc. (http://www.bloomberg.com/apps/quote?ticker=CNB%3AUS), a Montgomery, Alabama-based lender with $26.4 billion of assets, is down to a $126 million market cap, or 10 percent of its book value. Flint, Michigan-based Citizens Republic Bancorp Inc. (http://www.bloomberg.com/apps/quote?ticker=CRBC%3AUS), with $13 billion of assets, has a $91 million market value, or 7 percent of book. Austin, Texas-based Guaranty Financial Group Inc., with $15.4 billion of assets, this week said it may not survive and that it may revise its 2008 net loss to $2.2 billion from $444 million.
Truth is, there’s no way to know if the economy has turned the corner, or if last quarter’s market rally will prove sustainable. Yet when this many banks still have balance sheets that defy belief, it means the industry probably hasn’t re- established trust with the investing public.
Trust, you may recall, is the financial system’s most precious asset. On that score, we still have a long way to go before we can say this banking crisis is over.
(http://javascript%3Cb%3E%3C/b%3E:togShareLinks%28%27shr_v%27%29;)
Commentary by Jonathan Weil
July 2 (Bloomberg) -- Investors are feeling better about financial companies’ balance sheets than they were a few months ago. That’s not to say they have a lot of confidence in them.
Compare, for example, the stock-market value of Regions Financial Corp. with the bank’s reported net worth (http://www.bloomberg.com/apps/quote?ticker=RF%3AUS). At $3.97, the Birmingham, Alabama-based company’s stock is up 69 percent since its February low, giving Regions a $4.5 billion market capitalization. That’s still only a third of the $13.5 billion book value it showed as of March 31. In the market’s view, the bank’s asset values remain grossly overstated.
The same story is playing out across the financial-services industry. Financial stocks in the Standard & Poor’s 500 Index (http://www.bloomberg.com/apps/quote?ticker=SPX%3AIND) rocketed 35 percent during the second quarter, fueling the index’s biggest quarterly advance since 1998. Yet for hundreds of U.S. banks and insurance companies, a vast credibility gap remains when it comes to their accounts.
As of June 30, there were 336 U.S.-listed financial companies trading for less than 60 percent of their book value, including Citigroup Inc. (http://www.bloomberg.com/apps/quote?ticker=C%3AUS), SunTrust Banks Inc. (http://www.bloomberg.com/apps/quote?ticker=STI%3AUS) and Marshall & Ilsley Corp. (http://www.bloomberg.com/apps/quote?ticker=MI%3AUS) Together, they had a stock-market value of $233.1 billion, compared with $463.1 billion of book value, or common shareholder equity, according to data compiled by Bloomberg.
When I ran the same stock screen for a column about this same time last year, it turned up 168 companies with a combined $120.3 billion market value and a book value of $270.3 billion. The way the credit crunch was playing out then, market declines were begetting writedowns, leading to more market declines and then more writedowns, and so on. That downward cycle finally has been broken, only nobody knows what will come next.
Pressure on Management
Often when companies see their shares trading at large discounts to the net asset values on their books, their managers will feel pressure to take big writedowns and corresponding charges to earnings, especially for intangible assets such as goodwill leftover from past acquisition sprees.
These are strange times, though. After peaking during the fourth quarter of 2008, writedowns and credit losses at U.S. financial companies fell more than half to $101.8 billion in the first quarter, according to Bloomberg data. That was when financial stocks generally were at or near their lows (http://www.bloomberg.com/apps/quote?ticker=BKX%3AIND).
Bank managers may not be any more inclined to cleanse their books now than they were then. Prices and liquidity have improved for many of the mortgage-backed bonds that helped spur the global financial crisis. Loans generally don’t have to be marked down to market values anyway, under the accounting rules.
What’s worrisome about the financial sector’s rally is that it has been government-induced. So far this year, the Federal Reserve has printed lots of money, hyped stress tests for large banks that were hardly stressful, and made clear it won’t let big institutions such as Citigroup die.
‘Green Shoots’
The Treasury Department promised subsidies for buyers of banks’ toxic debt securities, a program now having trouble getting started.
Banks and insurers got Congress to browbeat the Financial Accounting Standards Board into making rule changes that will let them plump earnings and regulatory capital. There also was Fed Chairman Ben Bernanke (http://search.bloomberg.com/search?q=Ben+Bernanke&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1)’s line in March about “green shoots,” which sparked a media epidemic of alleged sightings.
For all this, we still have hundreds of financial companies trading as though the worst of their losses are still to come. Just imagine what their prognosis might be if the government hadn’t pulled out all the stops.
Hidden Losses
Meanwhile, housing prices (http://www.bloomberg.com/apps/quote?ticker=SPCS20%3AIND) keep falling. Bank regulators this week said delinquency rates on prime home mortgages more than doubled in the first quarter to 2.9 percent of such loans, up from 1.1 percent a year earlier. The peak of the interest- rate resets on adjustable-rate mortgages won’t hit until 2011, according to analysts at Credit Suisse Group AG. And while there’s a meltdown in commercial real estate, hardly any of the credit losses have shown up on lenders’ financial statements.
Many of the largest banks and insurance companies have taken advantage of the run-up in their stock prices to raise badly needed common equity, including Regions, which had a $1.6 billion stock sale in May. (Its books still show $5.6 billion of goodwill, about $1 billion more than Regions’ market cap.) Most distressed financial companies, however, have been shut out of the capital markets and face dim takeover prospects.
To name a few, Colonial BancGroup Inc. (http://www.bloomberg.com/apps/quote?ticker=CNB%3AUS), a Montgomery, Alabama-based lender with $26.4 billion of assets, is down to a $126 million market cap, or 10 percent of its book value. Flint, Michigan-based Citizens Republic Bancorp Inc. (http://www.bloomberg.com/apps/quote?ticker=CRBC%3AUS), with $13 billion of assets, has a $91 million market value, or 7 percent of book. Austin, Texas-based Guaranty Financial Group Inc., with $15.4 billion of assets, this week said it may not survive and that it may revise its 2008 net loss to $2.2 billion from $444 million.
Truth is, there’s no way to know if the economy has turned the corner, or if last quarter’s market rally will prove sustainable. Yet when this many banks still have balance sheets that defy belief, it means the industry probably hasn’t re- established trust with the investing public.
Trust, you may recall, is the financial system’s most precious asset. On that score, we still have a long way to go before we can say this banking crisis is over.