US Banks Giving Money Back - Good Problems To Have

Now that 3 major banks have applied to return TARP funds, we have the confusion that a seemingly positive move is being viewed with possible negative ramifications. By allowing them to give money back means they will no longer be under the "jurisdiction" of the US government. This will mean that they are more open to give out good salaries and good bonuses without having to consider the views or pressure from the government. This will allow the to recruit "better staff" who will be lured with a more generous compensation scheme. It is likely that the government will be delaying these 3 banks to give money back until more banks are at a better footing so as to be not be disadvantaged by the developments. Overall, these are good problems to have.

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Goldman Sachs and Morgan Stanley have formally asked the Federal Reserve for permission to repay a combined U$20 billion (S$29 billion) in federal bailout money.

The requests are pending, and no decision has been made on whether the investment banks will get approval to repay the money and sever ties with the Troubled Asset Relief Programme, according to two people familiar with the matter.

A JPMorgan spokesman declined to comment on whether the bank also has requested permission to repay. Goldman Sachs and Morgan Stanley representatives also declined to comment.

The Federal Reserve, the main regulator for all three banks, would have to approve any decision on repaying bailout funds.

Goldman and Morgan, which each received US$10 billion, initiated talks with the Fed in the past few weeks, according to the people.

The banks were among nine large financial institutions that took an initial US$125 billion in bailout money in October after the collapse of Lehman Brothers threatened to trigger a financial catastrophe.

If their requests are approved, Goldman and Morgan would be the first among the nine banks to repay bailout money. Twelve smaller banks have returned nearly US$1.2 billion in government money so far.

More than 570 banks have received about US$198 billion in bailout funds. Banks that want to repay bailout money must be able to replace the funds by raising capital without guarantees from the Federal Deposit Insurance Corp.

The issue of repaying the money is a sensitive one for the government. By allowing strong banks to abandon the bailout and its restrictions, it risks putting weaker banks at a disadvantage, analysts say. A big concern is that high-level employees of bailed-out banks could defect to rivals that have paid back the funds.

The government 'stress tests' on the 19 largest US banks found that 10, including Bank of America Corp and Citigroup Inc, needed to raise additional capital to survive a worsening recession.

Goldman Sachs and JPMorgan were among the nine banks found to have enough capital. Morgan Stanley needs an extra US$1.8 billion in capital, the stress tests ruled. The bank has already begun raising the money through stock offerings


p/s photo: Choi Jeong Won

Next Market Catalyst - Banks Stress-Test Results

The next catalyst for the US markets has to be the government's stress-testing of banks' results. Most analysts and commentators can only guess what the parameters are like. Some banks will be asked to raise additional capital due to the results of the stress-test.


19 banks were asked to submit to the test. If we look at the table for comparison, their Tier-1 capital would be a start. Those around 10% or below would fall under the "danger list", but its not all definitive, its probably one of the many factors that the government looks at. But Wells Fargo, Bank of America, even American Express and PNC Financial would fall under the "to be watched" category.


Of greater importance will be the Tangible Common Equity Ratio which has been harped on by Bernanke and Geithner. I think this measurement will be more critical. I would worry if the ratio is 4% or lower. Bank of America stands at just 3.1%. Citigroup is making me nervous at 1.7%. PNC Financial is there again at 3.3%, and US Bancorp is also there at 3.7%. Wells Fargo, despite registering such wonderful profits is there at 3.3%.


I think those that are below 4% will be barred from returning TARP funds back to the US government. Which is to say the Bank of America and Wells Fargo will still stay under the "jurisdiction of the US government" and will have to toe the line a lot more when it comes to compensation matters.


JP Morgan and Goldman Sachs are in the clear, and Goldman can return the funds should they wish. Returning the funds would allow Goldman to soothe executive nerves on drastic changes to their compensation scheme, and may act as a buffer to retain and attract talent in this difficult environment.


Even if Bank of America and Well Fargo may be asked to raise more capital. It is not a death sentence. It could just mean that these banks will have to try to convert existing preferred shares into common stock. We have to remember that when Citigroup did a similar announcement of the plan, it rocked the share price of Citigroup. The blessings of the stress-test is that it will make more transparent the health of major US banks. Even though some may be asked to raise more common equity capital, the general view should be more of a relief to investors that these banks are continually being subjected to more screenings and testing of their viability. The end result of the stress-test is probably a boost to confidence and may actually see banking stocks moving up higher in tandem.

In February, the Obama administration said 19 bank holding companies with more than $100 billion of assets would have to undergo a stress test. The move was designed to calm fears about the solvency of the banking system. The exams, conducted by more than 150 federal regulators, analyzed potential losses from residential mortgages to complex securities products. Banks will have several days to challenge the findings before the government makes results public the week of May 4.

p/s photos: Janice Man Wing Shan (a model turned actress, she will be a wonderful actress in the future judging by her stunning acting chops displayed in Love Story and La Lingerie)

Why The Surviving US Banks Are Worth A Punt Now

The surviving US banks are worth a punt now because of AIG. The US government now owns 80% of AIG (hands tied behind their back and you can drip candle wax on their naked bodies as well). AIG has been begging with their outstretched hands and for the fourth time in months, they got the most recent $30bn injection - add them all up AIG has taken $170,000,000,000 from the American public, and that does not even include the $85bn loan from Federal Reserve. There are so many zeros in that figure, imagine if you have a bank account with that kind of figure - it has to be an accounting entry, you cannot possibly transfer the sums via cash ... you CANNOT EVEN PRINT MONEY THAT FAST, if you wanted $170bn, you probably have to wait a few months to get your money. Hence it has to be an accounting entry, you credit AIG's accounts by $170bn and debit somewhere else... guess where... aahhh the Fed's debit entry. The biggest bank robberies cannot ever come close to robbing via an accounting entry. Its good to be the king! AIG already lost $40bn last year, so where did all the money go to?

Some $100bn went to banks. Yes, that right. We all know what CDOs are by now, and the banks have been buying many of these CDOs themselves, but at least most of them were smart enough to hedge some of those positions. They did so by buying Credit Default Swaps on these CDOs - i.e. if the CDOs fail then AIG will have to pay the banks. The following payments made to the banks largely consist of counterparty losses and Credit Default Swaps losses.

Among the biggest beneficiaries of the AIG's ATM was Goldman Sachs with $12.9 billion. Bank of America. But the bank that probably gained the most has to be Bank of America which together with Merrill Lynch got a collective $12bn.

Now do you you see why so many of these banks which got TARP money are now saying that they will now repay the money back.... so soon!!! ... after just a few months they can repay the funds back??? Suddenly things are so rosy. SocGen got $11.9bn, Deutsche Bank got $11.8bn, Barclays got $7bn, even the municipalities got $12.1bn. Surprisingly, Citibank was not on the list.... hmmm.

These sums are nothing to be sniggered at. First it reduces the uncertain asset in the "receivables" and turning that into certain "cash". Secondly, without tooting the horn, it probably improves the cashflow for these banks for 2009 materially as even they probably thought they would not get the cash back from AIG so soon.

p/s photos: Eri Otoguro

Rating The Top US Banks, Which Are The Zombies?

Came across this very interesting piece by Martin Hutchinson on the current state of the top 12 banks in the US. Which banks are zombies?

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Please note that the yen rate has scaled above 94 yen to the dollar, for those who are still following my thesis. Refer to posting on January 16, 2009.

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There is a lot of information - both about potential bailout needs and possible investment bargains - which we can gain from the banks’ annual earnings figures. For instance:

• Banks that made profits in the very difficult fourth quarter of 2008 are probably in good shape, especially if their loan-loss provisions exceeded their charge-offs (the amount actually lost).
• Even banks that lost money in the fourth quarter - an exceptionally harsh three months - have no immediate need for funding, provided they made money the rest of 2008 and seem likely to resume making money going forward.
• In this context, management’s dividend policy is a good indicator: If the dividend is maintained, rather than being sharply cut or suspended, management is probably genuinely confident about the bank’s position and outlook.
• Another good indicator of a bank’s health - at least of the market’s perception - is the ratio of share price to book value. If that’s below 25% or so the market lacks confidence in the bank’s ability to solve its problems.

Using these indicators, we can assess the viability of the leading U.S. banks. Each bank can then be classified with one of our four "official" Money Morning designations. These designations, or labels, consist of:

• Zombies: Institutions kept alive only by TARP funding. These subtract value from the economy and should be put out of their misery through controlled liquidation, with the healthy parts being salvaged.

• Walking Wounded: These banks may need a little bit more help, but are currently operating adequately on their own. One caveat: An intensification of economic downturn could push some of them into "zombie" status - or even bankruptcy.

• Risky but Proud: These banks have relatively high risks, because of acquisitions or their business models, but are operating at full blast and can hold their heads high for their success in dealing with 2008’s enormous difficulties.

• Hidden gems: These banks have conquered 2008’s difficulties, taken care of their bad debt problems, and still managed to make a substantial profit. Short of a repeat of what U.S. banks had to deal with from 1929-1933 as part of the Great Depression, these financial institutions should continue to operate in the black.

The Envelopes Please …

We listed the 12 largest U.S. banks by assets, as of Dec. 31, ignoring foreign-owned banks, Goldman Sachs Group Inc. and Morgan Stanley (those last two are onetime investment banks that are technically now commercial banks, but still possess a very different business mix. We give you a rundown on the financial stability of each one, and give each institution with the single-most-appropriate of our four official Money Morning designations. The Top 12 banks, biggest first, are as follows:

1. Bank of America Corp. - Zombie: BofA has about $2.8 trillion in assets including Merrill Lynch, and Countrywide Financial Corp., formerly the nation’s No. 1 housing finance bank. It received $45 billion from TARP, plus $118 billion in guarantees against Merrill Lynch’s assets. At Friday’s closing share price of $5.17, the stock was trading at 21% of book value (it closed at $4.90 yesterday). BofA posted a fourth-quarter net loss of $1.55 billion, plus a Merrill Lynch net loss of $15.3 billion, which forced BofA to cut its quarterly dividend to a nominal one cent per share. Judging by other banks’ results, if Bank of America had made no acquisitions in 2008, it would be in solid shape. With the acquisitions, however, it’s a basket case - and may well need even more federal funding.

2. JPMorgan Chase & Co. - Risky but Proud: JPMorgan has $2.175 trillion in assets, and received a $25 billion TARP investment. It’s a major international bank with a large investment banking operation. It bought Bear Stearns, investment bank in March and Washington Mutual in September, both with Federal government help.

JPMorgan booked $702 million in net income in the fourth quarter and $5.6 billion in net income for all of 2008. The company also had a fourth quarter loan-loss provision of $8.5 billion and charge-offs of $4.5 billion. But there were also $2.9 billion worth of securities markdowns in the investment banking operation. Again, this bank is high-risk from an investment standpoint because of its acquisitions, but it appears to be in excellent shape with no immediate need for extra funding. Its Friday closing share price of $24.69 equates to 72% of net asset value, though it closed yesterday at $21.65, down 12.3%. It pays a quarterly dividend of 38 cents per share.

3. Citigroup Inc. - Zombie: Citi remains the nation's third-largest bank, with $1.9 trillion in assets. It received a $45 billion TARP investment, plus guarantees on $301 billion of assets. At Friday’s close of $3.49, it was trading at 25% of book value. Citi lost $8.3 billion in the fourth quarter of 2008 and $18.7 billion for the whole year. It was finally forced to sell control over its Smith Barney brokerage operation to Morgan Stanley in January, and has reduced its dividend to a nominal penny a share. Citi has been a serial flirter with bankruptcy over the past 30 years and remains a basket case. There are a few good assets buried within the rubble - chiefly because the company is so large and diverse.

4. Wells Fargo & Co. - Risky but Proud: Wells Fargo has $1.3 trillion in assets, and garnered a $25 billion TARP investment. Originally a small bank based in San Francisco, Wells Fargo came into the big leagues when it merged with Wachovia, late last year. Its Friday closing price of $15.76 equated to 104% of its book value, though it closed yesterday at $13.69. Wells Fargo’s stock pays a quarterly dividend of 34 cents. The company posted a fourth-quarter net loss of $2.55 billion, not including an $11 billion net loss at Wachovia. Wells Fargo’s full-year earnings totaled $2.84 billion. It had a fourth-quarter loan-loss provision of $8.4 billion, compared with actual charge-offs of $2.8 billion. Wachovia’s 2006 acquisition of the California mortgage bank Golden West Financial puts Wells Fargo at risk, but the company’s operations appear solid and it has no immediate need for extra funding.

5. PNC Financial Services - Risky but Proud: The Pittsburgh-based PNC has $291 billion in assets, after buying the slightly larger National City Corp in October. It also received a $7.6 billion TARP investment. At Friday’s closing price of $28.20, PNC’s shares were trading at 79% of book value. The company pays a quarterly dividend of 66 cents per common share, and posted a fourth-quarter net loss of $248 million (excluding costs associated with its acquisition of National City, the company had a fourth-quarter profit of $132 million). PNC had provision for credit losses of $990 million, compared with net charge-offs of $207 million. This is one of the riskier banks because of the difficulties in integrating National City and possible problems in National City’s loan portfolio. But it appears to have no immediate need for funding and is currently profitable, and its stock is selling close to book value and paying a solid dividend. One final point: PNC’s shares fell only 6.1% yesterday, a day when the shares of most major banks fell by more than twice that amount, perhaps hinting that investors perceive less risk in PNC’s shares.

6. U.S. Bancorp - Hidden Gem: U.S. Bancorp has $266 billion in assets, and received $6.6 billion in TARP funding. This regional banking firm is based in Minneapolis, and the company operates primarily in the upper Midwest and Northwest. With a closing price of $12.40 on Friday, USB shares were trading at 131% of book value (the shares closed yesterday at $10.73, down 13.47%). The company also pays a quarterly dividend of 42.5 cents per common share. U.S. Bancorp posted a fourth-quarter profit of $260 million, and a profit of $2.94 billion for all of 2008. It also had a credit-loss provision $1.3 billion in the fourth quarter, compared with actual charge-offs of $627 million. U.S. Bancorp is in good shape, with no apparent need for extra money.

7. The Bank of New York Mellon Corp. - Hidden Gem: New York Mellon has $237 billion in assets, mostly through its operations in New York and Pennsylvania. It received $3 billion in TARP funding. With closing price Friday at $25.26, Bank of New York Mellon was trading at 125% of its book value (the shares closed yesterday at $23.13, down 8.4%). The bank posted a fourth-quarter profit of $28 million, and net income of $1.39 billion for all of 2008. The fourth quarter was tough as for everybody, but Bank of New York Mellon appears to have no near-term need for funding.

8. SunTrust Banks Inc. - Walking Wounded: Sun Trust has $189 billion in assets, and received $4.9 billion in TARP financing. Based in Atlanta, the bank has operations in the Mid-Atlantic and the Southeast. Its Friday closing price of $8.72 meant that SunTrust shares were trading at only 19% of their book value. The company posted a fourth-quarter loss of $379 million, but a profit of $747 million for all of 2008. It also had loan-loss provisions $962 million in the fourth quarter, compared with $552 million in charge-offs. SunTrust has reduced its quarterly dividend sharply to 10 cents per share, but it appears to be in no immediate trouble. However, if the economy deteriorates, the bank’s exposure to the Florida housing market could be an Achilles' heel. Investors are clearly concerned: SunTrust shares was down 18% yesterday and is down 88% in the past year. The Atlanta Journal-Constitution reported yesterday.

9. State Street Corp. - Hidden Gem: State Street had $174 billion in assets, and received $2 billion in TARP funding. It’s a Boston-based bank, but serves institutional investors throughout the world. At Friday’s closing price of $27, the shares were trading at 111% of their book value. State Street posted fourth-quarter earnings of $65 million, and 2008 earnings per share of $3.89, up 13% from the year before. With a global business, conservative leverage and Boston management, State Street could gather strength when the financial crisis finally ends.

10. Capital One Financial Corp. - Walking Wounded: Capital One has $161 billion in assets, and received a $3.6 billion TARP investment. It’s primarily a credit card company, headquartered in McLean VA. At Friday’s close of $12.11, it is trading at just 20% of book value. Capital One lost $1.4 billion in the fourth quarter of 2008, and was just below break-even for the full year, but made $895 million from continuing operations. Its stock pays a quarterly dividend of 37.5 cents per share. Capital One is in dangerous waters and could soon succumb to a zombie if credit-card problems really escalate.

11. BB&T Corp. - Hidden Gem: BB&T has $152 billion in assets, and accepted a $3.1 billion TARP investment. It’s a regional bank, headquartered in Winston-Salem NC, with its primary operations in the Mid-Atlantic region. At Friday’s closing price of $15.33 a share, the stock was trading at about 58% of its book value. The company posted net earnings of $284 million in the fourth quarter, after loan write-offs of $528 million. It posted a profit of $1.5 billion for all of 2008, and pays a quarterly dividend of 47 cents a share. I’m sure it would gladly take more taxpayer money, but it certainly doesn’t appear to need it.

12. Regions Financial Corp. - Walking Wounded: Regions has $146 billion in assets, and received $3.5 billion in TARP financing. It’s a regional bank, headquartered in Birmingham, AL, with operations primarily in the Southeast. At Friday’s closing price of $3.38 a share, Regions’ stock was trading at about 18% of book value, and the bank has suspended its dividend. The company lost $5.6 billion in 2008, and its tangible net worth is only $10.5 billion. However, on an operating basis, it made a profit of about $300 million. Regions had a fourth-quarter loan-loss provision of $1.15 billion, and charge-offs of $796 million. I’m classifying it as "walking wounded," but think it’s more likely to revive itself than to accept a toe-tag. In fact, it’s likely to need only a modest amount of additional funding to see its health improve.

p/s photos: Keiko Kitagawa