Four winners in the banking sector–and my guess on when to buy them

The banking crisis is by no means over. But I think we can start putting together a list of winners.

When we will want to buy stock in these banks is another question.

What characterizes the four winners that I’m going to name in this post?

Two things.

 First, they’ve come through the crisis so far in better shape than their peers. Their balance sheets are strong enough so that they can think about investing in future opportunities rather than about ways to survive.

Second, they have very attractive, already identified, opportunities ahead of them and they’ve already taken concrete steps to begin exploiting those opportunities.

I’ve got four winners in mind. I’m sure others will emerge as the world’s banks gradually work through still huge portfolios of problem loans. But right now these banks look like the best bets to exploit the crisis. Read more

And now for some good news on banks–well, sort of.

During the financial panic stage of the global financial crisis, banks wrote down some $1 trillion in securities. Much of this came as banks took losses on thin to trade or never traded securities. What President George W. Bush’s Treasury branded “toxic” assets.

Now it looks like banks will have a chance to write back up some of those securities when they report results for the third quarter, which ends for the majority of companies on September 30. The Market ABX index, which tracks the price of such assets as mortgage-backed securities based on a portfolio of subprime mortgages, is up 30% in the last three months.

So some banks will be able to report big gains on their portfolios of damaged assets when the release third quarter earnings. And that has the potential to get investors really excited about the recovery in the financial sector. A rally in financials, one of the sectors that have led the stock market higher since the March 9 low, would put new momentum behind a rally that has started to look shaky recently.

The question for  banks is how much of this 30% gain should they book now. And the question for investors is how excited they should get over what is essentially an accounting gain.

Here’s my take. Read more

Could Europe’s banks be in even worse shape than ours?

Hard as it is to believe, it looks likely:  European banks are in deeper trouble than those in the U.S. and they’ve done less to clean up their balance sheets than their U.S. counterparts.

At the end of this week, the finance ministers of the European Union countries are set to release their version of the U.S. stress test. You remember that exercise back in May, don’t you? U.S. regulators examined the books of 19 of the biggest U.S. financial companies and declared that 9 were adequately funded but that 10 had to raise a total of $75 billion in capital.

Well, the results from the European version of that test differ in one crucial way: while regulators will release a total that 22 large banks would lose if the economy grew more slowly than now expected, they aren’t going to name the banks that need recapitalization.

And you thought disclosure in the U.S. was bad. Read more

The Fed decided to go slow on removing housing stimulus–and that’s a good thing

I heard what I was hoping to hear in yesterday’s statement from the Federal Reserve’ s Open Market Committee: the U.S. central bank isn’t going to cut back its support for the U.S. mortgage market ahead of schedule or abruptly.

And that will keep mortgage interest rates from jumping so much that they kill off any chance of a recovery in the housing sector.

The Federal Reserve has been buying mortgage-backed securities hand over fist during the financial crisis. It has had to since private buyers have pretty much disappeared from the market.

 And without someone buying this paper banks would have quickly run out of mortgage money to lend. (Banks make mortgages and then Wall Street lumps those mortgages into mortgage-backed securities. When those are sold to another buyer, the bank that made the original mortgage gets its money back and can make more mortgages. It’s a way to multiply capital and that keeps mortgage money available and relatively cheap.)

The Fed launched a program to buy mortgage-backed securities late last year. Right now the Fed is about 2/3 of the way to the $1.25 trillion target that it set for the effort. The fear was that the bank would stop soon buying soon by redefining that target as “up to” $1.25 trillion rather than buying the full amount. Read more

Corus signals the next wave of bank failures

Here we go again.

On Friday, September 11, regulators seized Corus Bank of Chicago.

It’s the biggest bank failure to date with its roots in the commercial real estate and construction loan market. And it marks the start of the long-feared next stage of the banking crisis.

The first stage was fueld by bad loans in the residential real estate market–mortgages to individual home buyers. The next stage will take down bank that made bad loans to real estate developers.

This time most of the damage will be done to small and medium-size banks with big exposure to local commercial real estate markets.

Such as Corus Bank.

Corus, owned by holding company Corus Bankshares (CORS), had made $3.9 billion in condominium construction loans in overbuilt markets such as South Florida. More than half of those loans had stopped making payments or were in foreclosure, the company disclosed in April. The portfolio had continued to deteriorate since then.

Corus is/was an extreme case: construction loans accounted for more than 85% of the bank’s outstanding loans at the end of the first quarter. That’s a higher percentage than at any other U.S. bank with more than $100 million in loans outstanding.

But while the degree of its exposure to the sector pushed Corus over the brink early, the bank’s failure is just the first of many to come fueled by the problems in the commercial real estate sector. Read more