Huntington Bank Assures Investors. Are Banking Stocks Bottoming?
Last summer when I found out some friends owned Huntington Bank's stock, I encouraged them to sell it. I'm sure anyone who would have heard that conversation would have thought I was being a little too dramatic. Given the stock is down around 70-80% to the $5 range the only thing now dramatic is the size of the stock's drop and the fact that it appears Huntington could very well be in serious trouble. That is, unless investors are completely wrong in valuing the stock.
On Friday Huntington Bank, one of the largest regional banks in the U.S., assured investors that they were prepared for a weak economic environment. At the same time they are moving nearly $800 million in investments to nonperformaing assets. I suspect the CEO's comments could have been motivated by an attempt to stop a flight of depositor's capital that could develop with a plummeting share price. Accounts that are FDIC insured within the constructs of that program are considered safe but the real issue for Huntington is that any such flight could create a self-reinforcing spiral of less capital and potential concerns about capital ratios with regulators.
Banks with international exposure surely have greater access to capital than regional and smaller U.S. banks. But, then larger banks also have greater capital requirements. The pundit talk about banks being takeover candidates is generally wishful thinking. First off, the merger boom is over. And, secondly, few either have the will or wherewithal to ante up capital and deal with the issues of managing a merger when we are now entering the economic phase of this crisis. In other words, the risk of economically induced bankruptcies now rises substantially. Although those saving for a rainy day will indeed make substantial gains in this environment. One, is Warren Buffett who has amassed a massive war chest to feed off of the mistakes of the foolish.
As an aside, re the comment about the merger boom being over, you do now realize that the merger boom never would have taken place if banks had used appropriate risk management? Because the money never would have been there to lend. In other words, many American banks have been basically insolvent for years. Appropriate management of those institutions would never have allowed these foolish merger and acquisition loans to have been approved in the first place. Now we see banks dumping many of these loans and associated bridge loans for substantial loss. It also represents another very high risk for banks. One that is possibly larger than the mortgage mess.
Regardless, if one simply looks at Huntington's stock, they could conclude it is likely in a battle for its very existence. Or soon will be. Below is a chart of the company's stock since 1991. On Friday Huntington's stock was up almost 30% or somewhere north of $1 to $6 and change based on assurances by the CEO. Not to compare the two situations but banking executives made the same assurances in 1929 and 1930 and 1931 .......... right before we saw thousands of banks fail. I am sure the CEOs comments are accurate but are market participants pushing down the value of the shares based on today's position or concerns over the future of the economy? One must realize even regulators have publicly cautioned that we will see a rise in bank failures. Let's hope that doesn't happen but the economic environment is substantially precarious.
So are we seeing a bottom in banking stocks as Merrill Lynch is telling us? This brings up an interesting point. I had a recent correspondence with someone who was still buying bank stocks on the thesis that some banks were selling at a low price to earnings multiple on future earnings. Well, price to earnings is one of the great fallacies in how to value a bank's stock. In order to maintain equity valuations at varying percentages of book value, banks should show a sustainable dividend to book ratio based on a sliding scale of sustainable investment returns. In today's environment book values are dropping drastically and future returns on existing investments are producing hundreds of billions and soon to be trillions in cumulative losses. In addition, given these facts, what business can banks anticipate to return their portfolios to positive and sustainable returns? The reality is anticipated future earnings estimates are a fantasy. Ask any bullish analyst for a breakdown of future earnings estimates and one would surely find an analysis lacking in substantive specifics.
One of the things I model is bank liquidity and all I can say to Merrill Lynch's bottom call is ............ what are you looking at? I see absolutely nothing in support of such a call. Of course, I suspect Merrill's call is something more of a 'gut feel' because bank stocks have dropped so much. The logic of they have fallen so much they must be a buy is no logic at all. Unless they can prove their call through measurable and thoughtful analysis, it is fraught with tremendous risk.
On Friday Huntington Bank, one of the largest regional banks in the U.S., assured investors that they were prepared for a weak economic environment. At the same time they are moving nearly $800 million in investments to nonperformaing assets. I suspect the CEO's comments could have been motivated by an attempt to stop a flight of depositor's capital that could develop with a plummeting share price. Accounts that are FDIC insured within the constructs of that program are considered safe but the real issue for Huntington is that any such flight could create a self-reinforcing spiral of less capital and potential concerns about capital ratios with regulators.
Banks with international exposure surely have greater access to capital than regional and smaller U.S. banks. But, then larger banks also have greater capital requirements. The pundit talk about banks being takeover candidates is generally wishful thinking. First off, the merger boom is over. And, secondly, few either have the will or wherewithal to ante up capital and deal with the issues of managing a merger when we are now entering the economic phase of this crisis. In other words, the risk of economically induced bankruptcies now rises substantially. Although those saving for a rainy day will indeed make substantial gains in this environment. One, is Warren Buffett who has amassed a massive war chest to feed off of the mistakes of the foolish.
As an aside, re the comment about the merger boom being over, you do now realize that the merger boom never would have taken place if banks had used appropriate risk management? Because the money never would have been there to lend. In other words, many American banks have been basically insolvent for years. Appropriate management of those institutions would never have allowed these foolish merger and acquisition loans to have been approved in the first place. Now we see banks dumping many of these loans and associated bridge loans for substantial loss. It also represents another very high risk for banks. One that is possibly larger than the mortgage mess.
Regardless, if one simply looks at Huntington's stock, they could conclude it is likely in a battle for its very existence. Or soon will be. Below is a chart of the company's stock since 1991. On Friday Huntington's stock was up almost 30% or somewhere north of $1 to $6 and change based on assurances by the CEO. Not to compare the two situations but banking executives made the same assurances in 1929 and 1930 and 1931 .......... right before we saw thousands of banks fail. I am sure the CEOs comments are accurate but are market participants pushing down the value of the shares based on today's position or concerns over the future of the economy? One must realize even regulators have publicly cautioned that we will see a rise in bank failures. Let's hope that doesn't happen but the economic environment is substantially precarious.
So are we seeing a bottom in banking stocks as Merrill Lynch is telling us? This brings up an interesting point. I had a recent correspondence with someone who was still buying bank stocks on the thesis that some banks were selling at a low price to earnings multiple on future earnings. Well, price to earnings is one of the great fallacies in how to value a bank's stock. In order to maintain equity valuations at varying percentages of book value, banks should show a sustainable dividend to book ratio based on a sliding scale of sustainable investment returns. In today's environment book values are dropping drastically and future returns on existing investments are producing hundreds of billions and soon to be trillions in cumulative losses. In addition, given these facts, what business can banks anticipate to return their portfolios to positive and sustainable returns? The reality is anticipated future earnings estimates are a fantasy. Ask any bullish analyst for a breakdown of future earnings estimates and one would surely find an analysis lacking in substantive specifics.
One of the things I model is bank liquidity and all I can say to Merrill Lynch's bottom call is ............ what are you looking at? I see absolutely nothing in support of such a call. Of course, I suspect Merrill's call is something more of a 'gut feel' because bank stocks have dropped so much. The logic of they have fallen so much they must be a buy is no logic at all. Unless they can prove their call through measurable and thoughtful analysis, it is fraught with tremendous risk.
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