[Investor Forums] <<Aiii>> Banks Are The New Battering Rams

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Ronald Chisley

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Jul 15, 2008, 7:42:59 AM7/15/08
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July 15, 2008

Bank Stocks Are Battered as Unease Grows

 
No Banker wants to lose money by lending out to weak borrowers. But it is almost incidental and inevitable that NPAs arise when businesses undergo a sustained spell of recession. Are we in India not seeing the same happen all around us? Is it not the GOI's much vaunted objective to spend over $ 500 bn on infrastructure-that virtually pays nothing directly to the investor, is funded out of corporate or personal savings or Government Deficit finance but deposits with Banks are insured only to the extent of Rs 100,000.
 
Is it not conceivable that the run on smaller regional banks could so easily get replicated on smaller private banks and we have just too many of them around here: Bank Of Rajasthan, Lakshmi Vilas, Karnataka Bank, Karur Vysya and a host of cooperative Banks about whom no one even has a clue. While SOE Banks have the tacit support of the GOI, the others are on their own.
 
 
Even as the Bush administration moved to rescue the nation's two largest mortgage finance companies, confidence in the banking sector spiraled downward Monday.
 
In Southern California, lines snaked around branches of IndyMac Bancorp, the large lender that was seized by federal regulators on Friday, as customers hurried to withdraw their money. As the anxiety spread through the financial markets, two other big banks, one in Ohio and another in Washington State, were compelled to assert that they were sound.
 
Even as federal regulators issued assurances that depositors' savings were safe, Wall Street analysts circulated lists of lenders that might be vulnerable. Shares of regional banks plunged in one of the sharpest declines since the 1980s.
 
Many investors fear that the government's resolve to help Fannie Mae and Freddie Mac, the giant companies at the center of the nation's mortgage market, will not hold back the rising tide of bad loans unleashed by the weakening housing market and faltering economy.
 
Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation, said the F.D.I.C. expected a small number of the nation's banks to run into trouble over the next year. But she asserted that the worries driving down banking shares, fed by rumors in the marketplace, do not presage widespread failures.
 
"People should not assume that just because the stock price has been going down, that we're going to close their bank," Ms. Bair said. "In addition to our credit problems, I don't want to have to start worrying about bank runs."
 
Wall Street staged its own sort of bank run. Investors fled banking stocks en masse. The Standard & Poor's 500 Bank Index fell nearly 10 percent. Washington Mutual, the nation's largest savings and loan, lost more than a third of its value, prompting the lender to issue a statement that it was "well capitalized."
 
National City Corporation of Cleveland, which is the largest bank in Ohio, fell almost 15 percent. That bank also took the unusual step of issuing a statement saying that it was sound. The stock prices of large lenders in Tennessee, Alabama and Florida also swooned.
 
The worries about the financial industry that gripped Wall Street when Bear Stearns imploded in March and then spilled over to Fannie Mae and Freddie Mac last week.
 
They are now buffeting small and midsize banks, many of which are heavily exposed to weakening local property markets and loans to home builders. Some investors fret small institutions will not receive the kind of government support that rescued Bear Stearns and the two mortgage giants.
 
"The market wonders: which institution is too small to bail out?" said William H. Gross, the chief investment officer of Pimco, the large money management company. Traders "seem to have picked on the regional banks as potential candidates to be the ones too small to bail out."
 
Several bank analysts issued dire warnings about the banking industry, particularly smaller, regional lenders. Goldman Sachs said regional banks may be forced to cut their dividends to safeguard their finances, driving down shares of banks like Zions Bancorporation of Utah and the First Horizon National Corporation of Tennessee.
 
Rumors swirled that customers at National City were pulling money from the bank. There were no indications of mass withdrawals at the Ohio bank or any others aside from IndyMac, the lender based in Pasadena, Calif., that was seized by regulators last week.
 
"Look, we are not experiencing any unusual depositor or creditor activity today," said Kristen Baird Adams, a spokeswoman for National City. "There is widespread speculation and rumors in the markets today."
 
The rumors continued to rip through the markets despite a warning from the Securities and Exchange Commission on Sunday that it would crack down on traders who spread false rumors.
 
More bad news is likely this week from large banks like Citigroup, which are expected to report bleak quarterly earnings.
 
On Monday, M&T Bank kicked off the string of earnings releases, saying its profits dropped 25 percent from a year ago. The bank's stock price fell 15.6 percent on Monday.
 
Regulators and investors are bracing for a small number of banks to fail over the next 12 to 18 months. Analysts predict that 50 to 150 banks might stumble. In the first quarter this year, the F.D.I.C. listed 90 banks as troubled, which is far lower than the levels during the savings and loan crisis of the 1980s. Still, Ms. Bair said that number would increase. IndyMac, for example, was not on that first quarter list at the F.D.I.C. but was still seized by regulators..
 
"We've been saying for a long time that the number of troubled banks will go up, the number of failed banks will go up," Ms. Bair said. "It's going to be well into the next year at least."
Ms. Bair said her agency was prepared to handle the problem banks, after an extensive staffing increase.
 
The F.D.I.C. has about $53 billion to pay back consumers for deposits that are lost at failed banks and is already working on plans to raise more money to cover the depositor balances at IndyMac. The agency will raise the money from banks, she said, with riskier banks paying more. She emphasized that the number of failed banks still appears to be less drastic than those closed in the 1980s. Some banks may avoid failing because they are purchased just in time.
 
Nevertheless, the financial markets are reacting to even small rumors, so every bank failure presents the potential for panic, analysts said.
 
"It's about to start getting real bad," said Richard Christopher Whalen, managing director at Institutional Risk Analytics, a research firm based Torrance, Calif. The government, he said, should just move on with the process and "close not just one but a half-dozen institutions at the same time."
 
The government's plan for Fannie Mae and Freddie Mac initially seemed to calm nervous markets on Monday morning. The Dow Jones industrial average opened more than 1o0 points higher. The announcement should help regional banks that hold Fannie or Freddie bonds as well as Wall Street firms that do a significant amount of business for the government-sponsored entities.
 
Some investors said the government's plan simply reaffirmed negative fears about the mortgage market.
 
"One could argue that government measures validated concerns about how bad things really are," said David Bullock, managing director of Advent Capital Management, an investment fund in New York. "We are closer to the Depression scenario than not."
 
Customers at two National City branches in the Cleveland area did not seem worried, despite the near panic in the stock market. They said they had heard about the bank's drop in stock value from local radio and television news, but were not concerned enough to withdraw money from their accounts.
 
"Why, there's no run on the bank, is there? said Bernie Bragg, 60, who lives in Fairview Park, a Cleveland suburb. "It's no big deal to me. The government said it's going to bail out Freddie Mac and Fannie Mae. This thing with National City is small potatoes compared to that."


Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
 
Nothing in this article is, or should be construed as, investment advice.
 
 
 

 
 




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Posted By Ronald Chisley to Investor Forums at 7/15/2008 07:54:00 AM

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