24/7 Wall St. » STT

Big Banks Still At Big Discounts To Book Value Before Earnings (BAC, BK, C, GS, JPM, MS, NTRS, STT, STI, USB, WFC)

Administrator — Tue, 10 Apr 2012 12:10:09 +0000

This week will be the start of earnings season as we get to start reviewing some key earnings for first quarter of 2012. The banking sector is going to be of particular interest since we have had such a strong rally in financials since the end of December. Many banks have gotten permission to raise their dividends and buy back shares, and many of the key banks are still trading at substantial discounts to book value and/or tangible book value.

We will be paying extra attention to the money center banks of Bank of America Corp. (NYSE: BAC), Citigroup Inc. (NYSE: C), J.P. Morgan Chase & Co. (NYSE: JPM), and Wells Fargo & Co. (NYSE: WFC). We will also be watching the bank holdings companies without any bank operations from Goldman Sachs Group Inc. (NYSE: GS) and Morgan Stanley (NYSE: MS). On the trust bank side and fiduciary side, there is Bank of New York Mellon Corporation (NYSE: BK), State Street Corporation (NYSE: STT), and also Northern Trust Corporation (NASDAQ: NTRS).

We have shown the most recent closing prices, added in the Thomson Reuters consensus price target objective, and added in a 52-week trading range. We have then shown the tangible book value and/or the stated book value, depending upon what was available from each bank. The book values were taken from January press releases as of the end of 2011, but a couple had to be taken from ycharts.com as they did not report their stated book values. You will see some of the banks still trade at healthy discounts to their book value and to their tangible book values, while others now trade at premiums again.

Bank of America Corporation (NYSE: BAC) recently closed at $8.93, its Thomson Reuters consensus target is currently $9.79, and the 52-week trading range is $4.92 to $13.64. The company most recently noted that its tangible book value per share was $12.95 at December 31, 2011, compared to $12.98 at December 31, 2010. The stated book value per share was $20.09 at December 31, 2011, compared to $20.99 at December 31, 2010.

Bank of New York Mellon Corporation (NYSE: BK) recently closed at $23.34, its Thomson Reuters consensus target is currently $25.67, and its 52-week range is $17.10 to $30.29. The bank most recently noted that its book value was $27.62 at the end of 2011, down slightly from the $27.79 at the end of the third quarter but up from $26.06 at the end of 2010. On a tangible book value per share, that figure was $10.57 at the end of 2011 versus $10.55 at the end of the third quarter and up from $8.91 at the end of 2010.

Filed under: 24/7 Wall St. Wire, Accounting, Banking, Brokerage Firms, Earnings, Economy, Editor's Picks, Financial Stocks, Value Investing Tagged: BAC, BK, C, GS, JPM, MS, NTRS, STI, STT, USB, WFC

Looking for Big Dividends & Buybacks After Stress Tests (JPM, WFC, C, BAC, BK, STT, GS, MS)

Administrator — Mon, 12 Mar 2012 16:34:14 +0000

The next wave of stress tests on the U.S banks is due to come out by the end of this week. The Federal Reserve is expected to show that bank balance sheets have improved, and regulators are likely to allow big dividend hikes and buybacks to return to somewhat normalized levels. Deciding how much these big banks can really raise their dividends is one issue, but more important is that the banks may still remain conservative in their payouts. Doubling or tripling dividends might be possible, but most managers do not want any public backlash and they may opt to just do nominal dividend hikes along with larger share buybacks.

J.P. Morgan Chase & Co. (NYSE: JPM) is likely to be the first of the too big to fail banks to raise its shareholder payouts. JPMorgan might not double its dividend from the current $1.00 now (about 2.4% yield) to $2.00 (about 4.8%) on an annualized basis, but Thomson Reuters has estimates of $4.70 EPS in 2012. A 40% payout ratio would take the dividend to about $1.88 on an annualized basis. Expecting an 88% hike seems high, but that implies a 50% dividend hike is very doable and a large buyback will come.

Wells Fargo & Co. (NYSE: WFC) pays out $0.48 on an annualized basis today, and Thomson Reuters has estimates of $3.20 EPS for 2012. A 40% payout ratio would generate $1.28 on an annualized basis or about 4.1%. We do not expect that it will raise the payout that much, but it may use much of its excess liquidity to buy back stock selectively.

Bank of New York Mellon Corporation (NYSE: BK) and State Street Corporation (NYSE: STT) are both also expected to come out fine in the stress tests. These banks could probably double their dividends based upon expected earnings of the trust banks, but we are not as sure that they will formally do that. Bank of New York pays out $0.52 annualized today and yields 2.3%, and Thomson Reuters has estimates of $2.25 EPS for 2012; a 40% payout ratio would generate a $0.90 per year dividend and that yields close to 4%.

Bank of America Corporation (NYSE: BAC) and Citigroup, Inc. (NYSE: C) are both expected to try to increase their dividends and share buybacks. Prince Alwaleed bin Talal has recently said he would demand Mr. Vikram hikes the payout soon. Bank of America does not have a key holder making the same demands and it is still up for grabs as to just how much the bank will really have to allocate for mortgage losses and other settlements. BofA could be a disappointment on the dividends and buybacks. If it was just having to raise capital last year, regulators are likely to be less eager to allow Bank of America to start sending money out the backdoor to its shareholders.

Of the bulge bracket investment banks, remember that these are bank holding companies that really have no bank operations. Goldman Sachs Group, Inc. (NYSE: GS) yields only about 1.2% today and Morgan Stanley (NYSE: MS) yields about 1.1% today. Each are expected to be able to raise their dividends, but these banks are still more dependent upon the trends of financial market trading and investment banking than they are real loan and balance sheet performance of the traditional banks.

Starting on Monday we should be getting more of a focus on the stress tests. This week has been dominated by Greece and a slowing story of China and Brazil. More details and more predictions should start coming front and center on Monday.

JON C. OGG

Filed under: 24/7 Wall St. Wire, Banking, Brokerage Firms, Corporate Governance, Dividend, Financial Stocks, Regulation, Shareholder Issues Tagged: BAC, BK, C, GS, JPM, MS, STT, WFC

After Bank Stress Tests: Dividend & Buyback Predictions… A Double? (JPM, WFC, BK, STT, BAC, C, GS, MS)

Administrator — Thu, 08 Mar 2012 17:35:44 +0000

The next wave of stress tests on the U.S banks is due in the coming week. While many of the banks have reportedly been asking regulators to be less transparent, there are some banks which are likely to come out well ahead under almost all scenarios. The big trick is not just figuring out how much these big banks can really raise their dividends, but how much they really will start paying back to avoid public backlash. Some banks could easily double their dividends and some could triple their dividends. We expect dividend hikes, but some will likely choose share buybacks plus dividend hikes rather than throwing it all into dividends.

J.P. Morgan Chase & Co. (NYSE: JPM) is likely to be the major winner when it comes to dividend hikes and buybacks as far as the safe banks of the “too big to fail” institutions. JPMorgan might not double its dividend from the current $1.00 now to $2.00 on an annualized basis, but it might be able to if it believes that it can sustain $4.00+ in earnings per share. The bank is likely to do a 50% dividend boost at first and begin buying back stock more selectively.

Wells Fargo & Co. (NYSE: WFC) could take its dividend up to $1.50 per share per year with its earnings estimates above $3.00 per share for each of the next two years and that would be a tripling of the payout today. We do not expect that it will raise the payout that much (from only $0.48 annualized today), but it may use much of its excess liquidity to buy back stock selectively.

Bank of America Corporation (NYSE: BAC) and Citigroup, Inc. (NYSE: C) are both expected to try to increase their dividends and share buybacks. Prince Alwaleed bin Talal has already suggested that he will be demanding that Citi raise its dividend. The question is Bank of America because it was only a few months ago that the run on the bank was feared and that Warren Buffett came to the rescue. If it was just having to raise capital last year, regulators are likely to be less eager to allow Bank of America to start sending money out the backdoor to its shareholders.

Of the bulge bracket investment banks, ergo bank holding companies which have no bank operations, there is the case of Goldman Sachs Group, Inc. (NYSE: GS) and Morgan Stanley (NYSE: MS). Each are expected to be able to raise their dividends, but these banks are still more dependent upon the trends of the financial markets than they are real loan and balance sheet performance of the traditional banks.

JON C. OGG

Filed under: 24/7 Wall St. Wire, Banking, Dividend, Financial Stocks, Regulation Tagged: BAC, BK, C, GS, JPM, MS, STT, WFC

24/7 Wall St. Closing Bell (CHK, GOOG, KR, LNG, CCL, CREE, SCHW, FAST, GS, STT, CLWT, UEPS, COOL, KUTV, AAPL, MCD, NKE)

Paul Ausick — Wed, 18 Jan 2012 21:08:22 +0000

Markets opened slightly lower in the US this morning, but picked up steam in the morning and continued to rise, if slowly, for the rest of the day. The tech sector showed the most strength, with semiconductor stocks rising sharply and pushing the NASDAQ Composite index up more than 1.4% about half an hour before the closing bell. Financial stocks also did well today, and the euro rose back above $1.28 following a report that the IMF wants to increase its lending capacity to around $885 billion. Crude is mixed today, with WTI up fractionally at $100.78/barrel and Brent down -0.65% at $110.81/barrel. Gold rose as well today to $1,658.90.

The unofficial closing bells put the DJIA up nearly 97 points to 12,578.95 (0.78%), the NASDAQ rose nearly 42 points (1.53%) to 2,769.71, and the S&P 500 rose 1.11% or more than 14 points to 1,308.04.

There were several analyst upgrades and downgrades today, including Chesapeake Energy Corp. (NYSE: CHK) cut to ‘hold’ at Brean Murray; Google Inc. (NASDAQ: GOOG) cut to ‘market perform’ at Wells Fargo; The Kroger Co. (NYSE: KR) cut to ‘market perform’ at BMO Capital; Cheniere Energy Inc. (AMEX: LNG) started as ‘outperform’ with a $13.50 target price at Credit Suisse; and Carnival Corp. (NYSE: CCL) maintained as ‘hold’ but estimates cut at Argus.

Earnings reports since markets closed yesterday have led to some price changes as of the last half hour of trading today: Cree Inc. (NASDAQ: CREE) is up 4.3% at $24.33; The Charles Schwab Corp. (NYSE: SCHW) is down -1.3% at $12.00; Fastenal Co. (NASDAQ: FAST) is down -2.8% at $45.48; Goldman Sachs Group Inc. (NYSE: GS) is up 7.5% at $105.03; and State Street Corp. (NYSE: STT) is down -7% at $39.72.

Other standouts from today include the following stocks:

Euro Tech Holdings Co. Ltd. (NASDAQ: CLWT) is up nearly 53% at $3.91. The Hong Kong-based company has announced an 11-for-2 reverse stock split.

Net 1 UEPS Technologies Inc. (NASDAQ: UEPS) is up more than 33% at $8.96. The South African software maker has announced a 5-year deal with the government’s social security agency.

Majesco Entertainment Co. (NASDAQ: COOL) is down more than -27% at $2.17. The video game maker forecast higher sales and marketing costs in 2012.

Ku6 Media Co. Ltd. (NASDAQ: KUTV) is down nearly -18% at $2.71. The Chinese online video company rose more than 150% yesterday on the announcement of deal with Google. Today’s fall is likely due to profit-taking.

We also noted 10 stocks that posted new all-time highs today. These include Apple Inc. (NASDAQ: AAPL), McDonald’s Corp. (NYSE: MCD), and Nike Inc. (NYSE: NKE). See our coverage here.

Stay tuned for Thursday. We have noted the following events on the schedule (all times Eastern):

8:30 a.m. – Consumer price index
8:30 a.m. – Housing starts
8:30 a.m. – Initial unemployment benefits claims
10:00 a.m. – Philadelphia Federal Reserve business outlook survey
10:30 a.m. – EIA weekly natural gas inventory report
11:00 a.m. – EIA weekly petroleum status report
4:30 p.m. – Federal Reserve balance sheet and money supply

Paul Ausick

Filed under: HI/LOW, Market Close, The Day Tagged: AAPL, CCL, CHK, CLWT, COOL, CREE, FAST, GOOG, GS, KR, KUTV, LNG, MCD, NKE, SCHW, STT, UEPS

Bank of New York Versus State Street Earnings… Two Different Tales (BK, STT)

Administrator — Wed, 18 Jan 2012 12:39:17 +0000

Bank of New York Mellon (NYSE: BK) is in a different boat than State Street Corporation (NYSE: STT) after earnings this morning.

Bank of New York missed on the top and bottom line with earnings of $0.42 EPS versus $0.52 estimates; revenues were down over 5% to $3.54 billion versus the $3.74 billion estimate. Assets under custody and administration rose 3% to $25.8 trillion; Assets under management were up 8% to $1.26 trillion. The company talked up general uncertainty in the financial markets and lower levels of client activity.

State Street reported $0.93 EPS after charges versus $0.94 EPS estimates; revenue rose by 13% to $2.315 billion versus estimates of $2.4 billion. The company ended with a tier 1 common ratio of 16.9% and it has submitted its 2012 capital plan to the Federal Reserve Bank with plans for dividends and our share repurchases.

Bank of New York is down 3.6% at $20.49 and State Street has not yet started trading and we have not yet started seeing early indications in the early pre-market with about two hours until trading opens in New York.

JON C. OGG

Filed under: Banking, Brokerage Firms, Earnings, Economy, Financial Stocks Tagged: BK, STT

Many More Banks Report Earnings This Week (GS, STT, BK, USB, NTRS, AXP, BAC, MS, COF)

Administrator — Tue, 17 Jan 2012 16:20:59 +0000

We have already seen the first wave of bank earnings, but the rest of the week is full of bank and financial earnings. In fact, the real bank earnings season is all taking place on Wednesday and Thursday of this week.

We have compiled basic earnings previews and shown Thomson Reuters estimates from the following: Goldman Sachs Group Inc. (NYSE: GS); State Street Corporation (NYSE: STT); Bank Of New York Mellon Corp. (NYSE: BK); U.S. Bancorp (NYSE: USB); Northern Trust Corporation (NASDAQ: NTRS); American Express Co. (NYSE: AXP); Bank of America Corporation (NYSE: BAC); Morgan Stanley (NYSE: MS); and Capital One Financial Corporation (NYSE: COF).

Goldman Sachs Group Inc. (NYSE: GS) is set to report earnings on Wednesday morning and the earnings estimates have been coming down more than just marginally ahead of the expected earnings report. It is no longer expected to have the name “Golden Slacks” attached as a nickname right now. The current target is $1.24 EPS on $6.54 billion in sales, but the earnings targets were above $2.00 EPS recently and the street expected almost $3.00 just about 90 days ago.

State Street Corporation (NYSE: STT) is set to report earnings on Wednesday morning and the consensus estimate for the trust and custodial bank is expected to rise about 8% to $0.94 EPS. Bank Of New York Mellon Corp. (NYSE: BK) is set to report earnings on Wednesday morning and the earnings estimates are $0.53 EPS and $3.75 billion in revenues. We will be waiting to see if any of the charges to trust and custodial customers taking the cash holdings operations to a cost rather than as an interest bearing account will have made a difference. That seems to have gone away but it may have just been lost in the shuffle.

U.S. Bancorp (NYSE: USB) is expected to report earnings on Wednesday morning. The estimates are $0.63 EPS on $4.76 billion in sales. Northern Trust Corporation (NASDAQ: NTRS) is also due Wednesday morning and estimates are $0.68 EPS and $972.3 million.

American Express Co. (NYSE: AXP) is due on Thursday after the close and earnings estimates are $0.98 EPS and $7.92 billion in sales. As with the rest of the lenders and credit cards, we expect to hear continued improvements in credit metrics regarding the customer base.

Bank of America Corporation (NYSE: BAC) is due to report on Thursday morning. The most unpopular of the big ‘too big to fail’ money-center banks in America, has a consensus earnings estimate of $0.23 EPS on $24.08 billion in revenues. This has been the best DJIA stock so far in 2012 even including the last two trading sessions. It is a bit more than just interesting that earnings estimates have ratcheted higher over the last ten days when estimates elsewhere have been cut so much in banking. The huge discount to book value is again likely to be less material than in years passed.

Morgan Stanley (NYSE: MS) is set to report on Thursday morning as well. Long gone is worrying about the relative book value and long gone is the comparison to Goldman Sachs. Estimates are for a loss at -$0.57 EPS and $5.57 billion in revenues.

Capital One Financial Corporation (NYSE: COF) is due to report earning on Thursday and this is the credit card bank “for the rest of America.” The earnings report could be wildly far off of estimates because the bank is in the process of acquisitions which could greatly skew the headline numbers. A fresh SEC filing showed that monthly data showed a continued improvement in default rates and in late payments in December. The consensus estimate is $1.55 EPS and $4.08 billion in sales.

JON C. OGG

Filed under: Banking, Brokerage Firms, Calendar, Earnings, Financial Stocks, The Week Tagged: AXP, BAC, BK, COF, GS, MS, NTRS, STT, USB

J.P. Morgan Preview, Huge Bank Sector Book Value Discounts On Deck (JPM, WFC, BAC, C, STT, BK, MS, GS, AXP, COF, FAS)

Administrator — Thu, 12 Jan 2012 15:30:12 +0000

J.P. Morgan Chase & Co. (NYSE: JPM) is about to report earnings Friday morning as the first bank and second DJIA component kicking off earnings season. We wanted to make a preview on Jamie Dimon’s company as well as to highlight some of the discounts to book value and other color on rival banks as they are all likely to react to Friday’s news.

We will be paying extra attention to the money center banks of Bank of America Corp. (NYSE: BAC), Citigroup Inc. (NYSE: C), and Wells Fargo & Co. (NYSE: WFC); and then there are the “bankless bank holding companies” of Goldman Sachs Group Inc. (NYSE: GS) and Morgan Stanley (NYSE: MS) to consider as rival trading outfits. Then there is also American Express Co. (NYSE: AXP) with much of the same client base as Chase Banks and then the more mainstream Capital One Financial Corporation (NYSE: COF) to consider as well. On the trust bank side and fiduciary side, there is Bank of New York Mellon Corporation (NYSE: BK) and State Street Corporation (NYSE: STT).

We have added in color on each group as well as shown trading ranges, implied price targets, and the implied discounts to the stated book values.

J.P. Morgan Chase & Co. (NYSE: JPM) is the best of the large diversified money center banks to most investors and it still trades at 0.76-times its stated book value. The stock is at $36.35, the 52-week range is $27.85 to $48.36, and the consensus analyst price target objective is $46.29. Thomson Reuters has estimates of $0.91 EPS and $23.05 billion in revenues for the quarter. Keep in mind that estimates have ticked lower almost each week during the last quarter.

Bank of America Corp. (NYSE: BAC) was recently listed as being at well under 0.5-times book value, but the stock has been the top performing DJIA stock. With shares at $6.87, the 52-week range is $4.92 to $15.31. The consensus target is $9.02.

Citigroup Inc. (NYSE: C) was recently about 0.52-times stated book value. Shares are trading around $31.27 with a 52-week range of $21.40 to $51.50 and the consensus price target is $41.98.

Wells Fargo & Co. (NYSE: WFC) was recently trading at 1.1-times book value, making Warren Buffett’s favorite bank stock the only of the money center banks not at a discount to its stated book value. That is partly because the new trading rules and regulations are believed to have the least impact on it out of the money center banks. Shares are trading around $29.62 with a 52-week range of $22.58 to $34.25 and the consensus price target is $32.37.

Goldman Sachs Group Inc. (NYSE: GS) trades at about 0.7-times its stated book value and some now expect a loss when it reports earnings. At $99.76, the 52-week range is $84.27 to $175.34 and the consensus price target is $128.80.

Morgan Stanley (NYSE: MS) trades at a steep discount even to Goldman Sachs with a price/book ratio of only about 0.52-times stated book. Shares trade at $17.10 and the 52-week trading range is $11.58 to $31.04. The consensus price target is currently about $21.80.

American Express Co. (NYSE: AXP) is not at a discount to book value at all at 3.19-times book value because it is classified in such a different manner. Shares are trading at $48.95, the 52-week range is $41.30 to $53.80, and the consensus price target is $56.63.

Capital One Financial Corporation (NYSE: COF) may not be accurate on book because of the acquisitions and changes there. It is stated as being 0.75-times its stated book value. Shares trade at $47.71, the 52-week range is $35.94 to $56.26, and the consensus price target is $56.85.

Bank of New York Mellon Corporation (NYSE: BK) trades at 0.77-times its stated book value at the custodial and fiduciary bank. Shares are at $21.50, the 52-week range is $17.10 to $32.50, and it has a price target of $25.33.

State Street Corporation (NYSE: STT) is at a premium of 1.08-times its stated book value for the custodial bank. State Street;s stock is at $43.05, its 52-week range is $29.86 to $50.26, and the consensus price target is $47.36.

Price-to-book and price-to-earnings data provided by Finviz.com, consensus price target (mean target) provided by Thomson Reuters.

Many estimates have been trimmed by analysts of late for the banks and financials. We still expect modest credit metric improvements in most of the big banks and more importantly expect improvements in customer credit metrics to have improved again. The difference this quarter is that there should be a tick up in loan demand actually being met by the banks, but don’t expect any huge gains there.

Before you get too excited about the discounts to book value, this may still be more of a ceiling rather than a floor. Cash may have to be paid out in settlements, carrying cash balances yields literally nothing, and many banking operations remain in a state of muted flux.

Lastly, look for this to impact the wild triple-leverage ETF of the Direxion Financial Bull 3X Shares (NYSE: FAS), but watch the tracking error when the markets are not open.

JON C. OGG

Filed under: Banking, Brokerage Firms, Earnings, Financial Stocks Tagged: AXP, BAC, BK, C, COF, FAS, GS, JPM, MS, STT, WFC

S&P Downgrades All Major Banks, Criteria Changes (WFC, BAC, C, JPM, BK, STT, GS, MS)

Administrator — Tue, 29 Nov 2011 21:54:15 +0000

Standard & Poor’s is at it again… more downgrades and this time in the ailing banking sector. While we focused solely on the U.S.-based banks here, the downgrade was handed aimed at 37 of the large rated banks and is said to be a change in criteria downgrade. S&P noted also that it is reviewing the ratings placed on CreditWatch within 90 days.

Wells Fargo & Co. (NYSE: WFC) was cut to A+ from AA- and the outlook remains Negative. Bank of America Corporation (NYSE: BAC) was cut marginally to A- from A with a negative outlook. Ratings cuts also were awarded to Merrill Lynch, Bank of America, Countrywide, FIA, and U.S. Trust units. Citigroup Inc. (NYSE: C) was cut to A from A+ with the outlook remaining negative. J.P. Morgan Chase & Co. (NYSE: JPM) is supposed to be the strongest of them all, but S&P downgraded the rating to A from A+. While the Stable outlook was maintained, it seems odd that the downgrade was given without a prior Negative outlook.

Bank of New York Mellon Corporation (NYSE: BK) was cut to A+ from AA- and outlook is Negative. State Street Corporation (NYSE: STT) was maintained at an A+ rating, but the outlook went to Negative from Stable.

The Goldman Sachs Group Inc. (NYSE: GS) was cut to A- from A with a negative outlook remaining. Morgan Stanley (NYSE: MS) was cut to A- from A and the Negative outlook remained in place.

BofA closed down over 3% and the stock is off another 1% after the close at $5.02. Wells Fargo is down 0.75% at $23.90, Citi is down 0.7% at $25.07, and J.P.Morgan is down 0.4% at $28.45. Both Morgan Stanley and Goldman Sachs are lower by about 1% in the after-hours session.

JON C. OGG

Filed under: Analyst Calls, Banking, Bonds, Research Tagged: BAC, BK, C, GS, JPM, MS, STT, WFC

29 Global Banks ‘Too Big To Fail’, But Not Too Big to Tell the Truth (BAC, BK, C, GS, JPM, STT, WFC, MS)

Paul Ausick — Tue, 08 Nov 2011 14:29:24 +0000

Last Friday at the meeting of the G20 in Cannes, the Financial Stability Board (FSB) revealed a list of 29 global systemically important financial institutions (known as the G-Sifis). These institutions are deemed to be so important to the interconnected global financial system that the unexpected and disorderly failure of any one of them could seriously threaten the world’s financial markets. Of the batch, seven US banks made the list: Bank of America Corp. (NYSE: BAC), Bank of New York Mellon (NYSE: BK), Citigroup Inc. (NYSE: C), Goldman Sachs Group Inc. (NYSE: GS), JP Morgan Chase & Co. (NYSE: JPM), State Street Corp. (NYSE: STT), and Wells Fargo & Co. (NYSE: WFC). Now things start to get interesting.

These 29 banks have been awarded an implicit guarantee that they are, indeed, ‘too big to fail.’ That’s the good news. The not-so-good news — at least from the institutional point of view — is that capital requirements for the banks will increase and each bank must create a plan by the end of 2012 describing how they would wind themselves down if necessary.

Boosting capital reserves presents little or no problem for any of the banks. The US banks can manage that easily by increasing their retained earnings. They’ll squawk some, but that will be mostly for show.

The requirement that each bank create what amounts to a ‘living will’ represents the real teeth in the G-Sifi designation. The rule is intended to shine a light on a bank’s lending and trading practices, and that transparency is expected to restrict moral hazard. This is far from being a guarantee that if one of these banks fails that world governments will ride to the rescue. The G-Sifi banks will have to disclose where the money is, how it’s being lent and borrowed, and how much risk the bank is really taking. Presumably, the ‘borrow short, lend long’ practices that crushed Lehman Brothers and nearly killed AIG would at least be open to inspection and criticism, if not regulatory prohibition.

For example, recent reports provide very different estimates of US banks’ total exposure to the debt of Portugal, Ireland, Italy, Greece, and Spain (the PIIGS or, more genteelly, the GIIPS). The total direct exposure of five US banks to Greek debt is about $8.6 billion. Not much in the great scheme of things. Here’s a chart from Citigroup published at the Financial Times Alphaville blog:

However, when derivatives and other financial instruments are included, these banks’ direct exposure to the PIIGS debt was estimated at $175 billion, and the Bank of International Settlements set the total at around $725 billion. This figure is disputed by the US banks, which prefer to net out their exposure over their entire portfolio. They come up with a figure of about $50 billion.

The 29 G-Sifi banks won’t be able to account for their derivatives in a way that best suits the individual bank. The FSB will force the banks to follow a single set of rules that should provide figures that can be examined and compared.

For investors and regulators, transparency is a wonderful thing. For banks, it is less so. In the coming months, look for at least some of the G-Sifi banks to try to get out from under the designation. These banks will have figured out that being TBTF is a curse, not a blessing.

Paul Ausick

Filed under: Banking, Financial Stocks, International Markets, Regulation Tagged: BAC, BK, C, GS, JPM, MS, STT, WFC

24/7 Wall St. Closing Bell (BAC, CHTR, HAL, EP, KO, IBM, JNJ, STT, APEI, BMI, CROX, HALO, HOG, HGSI, USU)

Administrator — Tue, 18 Oct 2011 20:08:25 +0000

Today was a day of red that went to a day of green. Earnings were at first a disappointment, and producer price index came out far hotter at +0.8% on the headline number before the +0.2% reading if you back out food and energy prices from the producer prices. The market rallied with financial stocks from the start of the day and the market losses suddenly became gains. Homebuilders also looked a bit less-pessimistic in their latest survey. The big news came from a report out of England that France and Germany have supposedly agreed to increase the European Financial Stability Fund to up to $2 billion ahead of the Sunday meeting, although this seems to be a stretch based upon Europe’s slowness to act so far.

The unofficial closing bells put the DJIA up triple digits with a gain of 178 points to 11,575.46, the NASDAQ rose more than 42 (1.6%) to 2,657.43, and the S&P 500 rose 2% or 24 points to 1,225.28. Today’s top analyst upgrade and downgrade calls were numerous and included Charter Communications Inc. (NASDAQ: CHTR), Halliburton Company (NYSE: HAL), and more than a dozen other companies.

There has been a turnaround from the indicated loss in Bank of America Corporation (NYSE: BAC) after its earnings showed that book value managed to actually grow and the stock was up almost 10% at $6.63 late in the session.

Some food for thought… Now the MLP and pipeline sector may look cheap on the heels of the El Paso Corporation (NYSE: EP) buyout.

As far as the other big earnings report reactions today (prices within 20 minutes of the closing bell): The Coca-Cola Company (NYSE: KO) was down 0.3% at $66.79; International Business Machines Corporation (NYSE: IBM) was a huge drag on teh DJIA with shares still down 4.5% at $178.30; Johnson & Johnson (NYSE: JNJ) was up 1.2% at $64.54; State Street Corporation (NYSE: STT) was up 9% at $36.97.

Several other standouts from today are as follows…

American Public Education Inc. (NASDAQ: APEI) lost more than 20% of its value to $30.05 after the American Military University will see far lower tuition assistance from the U.S. Marine Corps.

Badger Meter Inc. (NYSE: BMI) was a loser even if it is supposed to be a water winner after missing earnings estimates. Shares were down 13% at $29.08 in the final minutes of the day.

Crocs Inc. (NASDAQ: CROX) was a disaster after an earnings warning that would not have been so bad had the stock not been up 100% from its 52-week lows before the report. The stock was down a massive 39% at $16.20 right before the close on more than 8-times normal volume of 25 million shares.

Halozyme Therapeutics Inc. (NASDAQ: HALO) was such a winner that it should be called “Master Chief” for its stock ticker. Its subcutaneous Herceptin trial met the study goals and the stock was up over 18% at $7.34 right before the close. This was not even a 52-week high.

Harley-Davidson Inc. (NYSE: HOG) was about 4% shy of sales targets in its earnings report and that had the stock down 7% to $34.56 right before the close. With a 52-week high of $46.88, it seemed a bit harsh of a reaction even with slightly lower margin guidance.

Human Genome Sciences Inc. (NASDAQ: HGSI) was up over 15% at $12.95 on reports that a $25.00 per share buyout could be headed its way. We gave a handicap on the odds of a deal happening.

USEC Inc. (NYSE: USU) broke a major run higher today and still no news exists. The belief is that the loan approval from the DOE may get a better review now that solar loan fraud seems to be prevailing after Solyndra. Shares were down 4% at $2.10 right before the close. Still, this was a $1.30 stock just last Thursday.

Stay tuned for Wednesday. We have speeches to watch from Rosengren and Lockhart on the docket as well as a hearing about ETFs. Here are some economic releases due in the morning and throughout the day:

8:30 September CPI
8:30 Housing Starts
10:30 Weekly Oil Inventories
2:00 PM Beige Book

JON C. OGG

Filed under: Economy, The Day Tagged: APEI, BAC, BMI, CHTR, CROX, EP, HAL, HALO, HGSI, HOG, IBM, JNJ, KO, STT, USU