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Its Unanimous: Banks Have Bottomed!

Posted By Barry Ritholtz On July 19, 2008 @ 10:12 am In Contrary Indicators,Credit,Dividends,Financial Press,Valuation | Comments Disabled

Barrons_bank_covr [1]
Very strange confluence of media coverage this morning on the banking sector. All three major financial papers (WSJ, NYT, Barron’s) have stories on the bottom of the banking sector:

WSJ: Jitters Ease as Citi, Rivals Show Signs of Bottoming Out [2]

NYT: Hope, and Hints, That Financial Stocks Have Finally Touched Bottom [3]   

Barron’s: Buy Banks -Selectively [4]  (cover story)

Can you recall the last time 3 major media players all picked the bottom in a market or sector on the exact same day — and were all proven correct?

Perhaps the caveats are worth noting — I found it interesting that all publications had some moderating hedges in place (as opposed to some recent embarrassing cover articles [5]).

Bounce [6]

As we noted early this week, we covered most of our shorts [7] in the financials, and are now looking for a bounce play in these names. However I remain unconvinced that Banks are now a good long term investment.

Why? The business model of Leverage and Capitalization is now kaput. Its a new era of De-leveraging, and Re-capitalizing.

A long time ago, Banks were 3-6-3 spread players. Pay your depositors 3%, make loans at 6%, be on the golf course at 3pm. But the end of Glass Steagell [8], and the mergers with investment banks, have put an end to that simple but profitible business. For the past 10 years or so, we seen a model that involved taking on a lot of risk, then leveraging it up 25X, 35X, even 65X (for Fannie).

Now that model has come unglued. Banks of all types are unwinding risk, de-leveraging (selling off assets held on borrowed money) and raising capital. This means that until a new model is developed, profits will be anemic and the shareholder capital structure is about to get wildly diluted.

Bad_but_better [9]

Freddie Mac (FRE), with its $6B cap, is seeking to raise $10B. That will be enormously dilutive to both future earnings, and shareholder equity.  Remember that Lehman Brothers (LEH) capital raise [10]? $6 Billion secondary priced at $28 with 8.75% coupon and an %18 conversion premium? The stock is now $19m, the cap is $13.3B. After the last debacle, good luck with future capital raises — they are likely to be treated much more skeptically.

Is "the" bottom in?

Well, it certainly looks like "a" bottom is in. 

But longer term, this is a sector that is likely to have continued write downs, weak earnings prospects, and a whole lot more regulation and government supervision than it got away with in the past. P/E compression may also be in the cards — especially if we see some dividend cuts from some of the bigger houses. 

Unless you have a decade long time horizon, does that make you want to rush out and own these things anytime soon?  Me neither . . .

Charts & Tables:
Bank_table_2 [11]
click for larger graphic

Bottom_2 [12]

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UPDATE: July 20, 2008 8:23pm

Bottom_banks [13] Several readers have noted that this is Barron’s 2nd attempt to tag a banking bottom in 4 months.

The last time out, they recommended [14] as "cheap" Merrill (MER), Citigroup (C), UBS, HSBC  (HBC), Morgan Stanley (MS), Deutsche Bank (DB), Bank of America (BAC), Credit Agricole (ACA) Washington Mutual (WM) and Credit Suisse (CS).

Ouch . . .

Hitting Bottom? Several Banks and Brokerages Are Ready to Pop Up for Air [15]   
JACQUELINE DOHERTY
BARRON’S COVER MARCH 24 2008   

http://online.barrons.com/article/SB120614230339356243.html

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Previously:
Forbes Video: More bank write-downs, U.S. recession, Avoid Home Builders [16] (3/28/08)
http://bigpicture.typepad.com/comments/2008/04/forbes-video-32.html

Quote of the Day: Citibank on Glass Steagall [8] (July 08, 2008)   

http://bigpicture.typepad.com/comments/2008/07/quote-of-the–3.html

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Related:
Video: Still Too Bullish [17] (Apr. 1 2008)
http://www.cnbc.com/id/15840232?video=700094755>

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Sources:
What to Bank On [18]
ANDREW BARY 
Barron’s JULY 21, 2008
http://online.barrons.com/article/SB121642073624766417.html

Jitters Ease as Citi, Rivals Show Signs of Bottoming Out [19]
DAVID ENRICH
WSJ, July 19, 2008; Page A1
http://online.wsj.com/article/SB121636319957764985.html

Hope, and Hints, That Financial Stocks Have Finally Touched Bottom [20]
FLOYD NORRIS
NYT, July 19, 2008
http://www.nytimes.com/2008/07/19/business/19charts.html

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Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2008/07/its-unanimous-banks-have-bottomed/

URLs in this post:

[1] Image: http://bigpicture.typepad.com/photos/uncategorized/2008/07/19/barrons_bank_covr.gif

[2] Jitters Ease as Citi, Rivals Show Signs of Bottoming Out: http://online.wsj.com/article/SB121636319957764985.html

[3] Hope, and Hints, That Financial Stocks Have Finally Touched Bottom: http://www.nytimes.com/2008/07/19/business/19charts.html

[4] Buy Banks -Selectively: http://online.barrons.com/article/SB121642073624766417.html

[5] cover articles: http://bigpicture.typepad.com/comments/2008/07/barrons-cover-g.html

[6] Image: http://bigpicture.typepad.com/photos/uncategorized/2008/07/19/bounce.gif

[7] covered most of our shorts: http://bigpicture.typepad.com/comments/2008/07/wild-times-on-w.html

[8] Glass Steagell: http://bigpicture.typepad.com/comments/2008/07/quote-of-the--3.html

[9] Image: http://bigpicture.typepad.com/photos/uncategorized/2008/07/19/bad_but_better.gif

[10] capital raise: http://bigpicture.typepad.com/comments/2008/06/lehman-posts-ju.html

[11] Image: http://bigpicture.typepad.com/comments/files/bank_table.png

[12] Image: http://www.nytimes.com/imagepages/2008/07/19/business/19charts.web.html

[13] Image: http://online.barrons.com/documents/barrons20080324.htm

[14] recommended: http://online.barrons.com/article/SB120615074113756883.html

[15] Hitting Bottom? Several Banks and Brokerages Are Ready to Pop Up for Air: http://online.barrons.com/article/SB120614230339356243.html

[16] Forbes Video: More bank write-downs, U.S. recession, Avoid Home Builders: http://bigpicture.typepad.com/comments/2008/04/forbes-video-32.html

[17] Video: Still Too Bullish: http://

[18] What to Bank On: http://online.barrons.com/article/SB121642073624766417.html

[19] Jitters Ease as Citi, Rivals Show Signs of Bottoming Out: http://www.ritholtz.com/blog http://online.wsj.com/article/SB121636319957764985.html

[20] Hope, and Hints, That Financial Stocks Have Finally Touched Bottom: http://www.nytimes.com/2008/07/19/business/19charts.html

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