China has rewarded some of its biggest banks with a carrot after beating them with a stick. And the financial markets have cheered. The cheering is so loud, in fact, that it is helping the world’s emerging markets put in a potential bottom.

I worry, however, that the real message is that problem loans are shifting from banks to other channels.

China has raised reserve requirements for all its banks to a punitive 19.5% in an effort to slow bank lending, reduce the growth rate of the money supply, and rein in inflation.

But some banks have had to keep even more in reserves because the government has decided they are too loose with their loans. The higher reserve requirements—I’ve heard these banks have had to keep an extra percentage point of reserves with the People’s Bank—were an attempt to get the banks in line with government policy.

And apparently it worked. Read more

They’re doing What? Again?

How quickly they forget.

Northern Rock, the first British bank to be taken over by the British government at taxpayer expense during the global mortgage crisis, is back in the 10% down mortgage business.

And regulators are cheering the bank on because the bank need to show more revenue as it gets ready to sell shares to the public again.

Northern Rock ran into trouble in 2007 as the mortgages it had made to riskier borrowers went south with the British real estate market. A big part of the problem was that the bank’s most aggressive products didn’t leave borrowers any room for error if the price of their house dropped or the economy went into recession. Northern Rock’s most famous product was the “Together” mortgage that let borrowers take out a mortgage or up to 125% of the value of the house they were financing.

In February 2008 the government essentially nationalized the bank in order to protect depositors and stabilize the financial markets. Loans to the bank came to 25 billion pounds (and the pound was worth something then.) Guarantees added an additional 30 billion.

Since then a chastened Northern Rock has required borrowers to put down 15% to get a mortgage. But that’s about to change. Read more

Buy Banco Bilbao Vizcaya Argentaria (BBVA)

The draconian reform of Spain’s undercapitalized caja banking sector is shaping up as a major opportunity for Spain’s big international banks Banco Santander (STD) and Banco Bilbao Vizcaya Argentaria (BBVA).  The biggest opportunity lies with Banco Bilbao, I think, because it has neglected its home market for the last 10 years and the troubles at the cajas give the bank a chance to rebuild a domestic market share that has fallen to 11% from 16% a decade ago.

I own Banco Santander in my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ where it’s up 18.3% since I added it on May 28, 2010. The trailing 12-month yield is 6.65%.)

Today, February 15, I’m adding Banco Bilao Vizcaya Argentaria to my Jubak’s Picks portfolio. Read more

Update HDFC Bank (HDB)

Another day, another interest rate increase from an emerging economy central bank.

On January 25, it was the turn of the Reserve Bank of India. The bank raised its benchmark repurchase rate to 6.5% from 6.25%. The Reserve Bank of India raised interest rates six times in 2010 and the benchmark rate is now at a two-year high.

I don’t think the Reserve Bank of India is done either. The bank’s most recent projections are pointing to inflation of 7% by the end of the country’s fiscal year on March 31. That’s a huge increase from earlier projections of 5.5% inflation. (The bank is also calling for GDP growth of 8.5% for the year that ends in March. That’s unchanged from earlier projections.)

And the Reserve Bank’s projection is very likely low. Inflation in wholesale prices, India’s preferred inflation measure, hit an annual rate of 8.4% in December.

Not surprisingly Indian stocks fell on the news of the interest rate increase with the Mumbai market’s Sensex 30 Index closing down 1%. The drop was widespread—Infosys Technologies fell 0.8%, for example–but property and bank stocks were among the shares suffering the biggest declines. Read more

This is a very tough call.

If I owned more than one Brazilian bank stock, I might not sell Banco Bradesco (BBD) out of Jubak’s Picks today—but I don’t.

If I had less exposure to Brazilian stocks in my Jubak’s Picks portfolio, I might not sell Banco Bradesco—but I own Cosan (CZ), Gerdau (GGB) and AmBev (ABV) as well.

If I could sell just a part of my position in the stock, I would sell just part of the position—but I can’t in Jubak’s Picks.

So today, January 27, I’m selling Banco Bradesco out of this portfolio with a 5.8% loss since I bought it on November 17, 2010.

What has pushed my concern to action today, January 27, is continued pessimism among Brazilian analysts and economists about the inflation picture in Brazil. Economists have raised their 2011 inflation forecast for a seventh straight week to 5.53% from 5.42%. For 2112 the forecast rose to 4.54% from 4.5%.

I think this is a disturbing vote not of “no confidence” but of “too-little confidence” in new central bank president Alexandre Tombini. Read more