Bad Times For Big Banks
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Oh, the indignity of it all. Groveling to the Administration and the American public for help late last decade, scorned during repeated bouts of Congressional Testimony, horrid financial setbacks, scandal after scandal, and now the latest. The nation's five largest international banks were apparently ordered in 2010 not only to prepare “resolution reports” that were filed in early July, they were also ordered to prepare separate plans for staving off collapse once they begin to deteriorate. This was likely in response to the general idea that banks and finance companies such as AIG (AIG) and Lehman Brothers were not assertive or flexible enough to deal with the worsening conditions 2007 and 2008, causing one to fail, and the other to be the largest recipient of taxpayer largess in the TARP program.
Reuters reported that Citigroup (NYSE: C), Bank of America (NYSE: BAC), JPMorgan Chase (NYSE: JPM), Goldman Sachs (GS) and Morgan Stanley (MS) were ordered in 2010 to supply these “distress plan reports” that have been a secret until recently. The idea is that if things turn sour for a bank, either due to individual bank issues or macroeconomic issues, that these institutions could take steps to avoid a cascading failure within the bank. Perhaps the reason it has come to public attention now might have something to do with several multi-billion dollar issues, like the well-known trading loss at JPMorgan, that recently forced a second restatement of first quarter earnings, and will ultimately cost the bank nearly $6 billion.
Citigroup also has a huge write down pending. Bloomberg reports that it may take a charge of up to $6 billion as an independent third party is evaluating the Smith, Barney brokerage, of which Citigroup is a 49% owner. The LIBOR scandal is alive and well, and will have impacts upon certain American banks sooner rather than later, I believe.
I am far from alone from my current distaste for big bank stocks. It has been reported Leon Cooperman, President of Omega Advisers Inc., has either cut or reduced that firm's holdings in Bank of America, JPMorgan and Citigroup during the second quarter.
All these banks, and all their peers, are negotiating great economic uncertainties. With each month passing, our January 1, 2013 fiscal cliff draws nearer, and if automatic tax increases and government spending cuts come to pass, I really do not know what will happen in this sector. Many large banks are already selling near or below their tangible book values, and greatly enhanced their capital levels from where they were in 2007, at the start of the credit and banking crisis. In fact, some are so awash in capital, and unwilling or unable to loan that money out, that they are buying back previously issued bonds. Citigroup recently cited this, excess capital, as the precise rationale in announcing the redemption of over $12 billion of notes.
Bank of America, on the other hand, is continuing to raise cash and divest itself of much of what had been its considerable cache of off shore investments. It has sold tens of billions of assets, as near as Canadian credit card receivables, to as far away as its previously vast stake in China Construction Bank (CICHY), since 2009. It has recently added to those liquidations by agreeing with private owned Swiss bank Julius Baer for the latter to acquire Bank of America's non domestic wealth management business in a deal valued at a little under $900 million. That amount will simply add to the banks over $400 billion of excess liquidity, and wouldn't it make sense for the company to loan a chunk of that out to make a reasonable, even by today's standards, return on that cash? Nope, as Bank of America has ceded its previously leading role in the domestic mortgage market by refusing loans that have been brokered by third parties.
The five banks being forced to prepare this report on responding to negative conditions are identical to the banks ordered to prepare final resolution plans, aka “living wills” in early July of this year. I don't enjoy considering the man hours that go into these types of reports, and really wonder why the Federal Reserve has demanded two separate reports from the same five banks before seeking even one such report from “second tier” large banks such as Wells Fargo (WFC), U.S. Bank (NYSE: USB) and PNC Financial (PNC). Of course, none of these banks have the sorts of investment banking or international exposure that the targeted institutions have, but Dodd Frank required resolutions from all banks with over $50 billion in assets, not just those the Federal Reserve thinks are the most at risk.
It is important to be mindful that virtually all banks are far stronger today than at any time in recent memory. Bank of America's global liquidity has nearly doubled from early 2009. Its risk weighted assets have fallen by over half a trillion dollars from 2009 levels, to about $1.2 trillion, and its Tier One capital has risen to 11.24% at the end of the second quarter of 2012, over 300 basis points above the level 12 months earlier, and is approaching three times the level of early 2009. With more capital and a more manageable balance sheet, I really am much more concerned about Bank of America's ability to turn profits as opposed to its ability to withstand some stress.
On balance, I do not see why one would invest now in any of the above banks. Safer risks like U.S. Bank, along with better speculative options like Regions Financial (RF) abound. These and smaller banks also benefit from not being the center point of the Federal Reserve's attempts at controlling systemic risks.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Citigroup Inc , and JPMorgan Chase & Co. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.