On Q2 Bank Earnings and IRA Ratings, Very Briefly
I thought the readers of TBP might be interested in where we are with the development of our bank ratings and also which banks we actively follow as part of the IRA Advisory Service. Of note, we’ve also built a new theme park for our consumer users: www.irabankratings.com.
Over the past four years, we have established several objective and subjective measures for looking at bank safety and soundness benchmarking, including:
** The Banking Stress Index: An objective stress test survey of the entire US banking universe looking at discrete measures including Return on Equity, Capital, Defaults, Lending and Efficiency. We present as an index, with the benchmark year set to 1995 (a mediocre year) with a value of 1 and limit the maximum score to 100 or two orders of magnitude above the benchmark year. Banks being resolved by the FDIC typically have stress score near 10, while the industry average stress is around 2.3.
** CAMELS Ratings: This is a more subjective measure that uses the regulatory, 1-5 scale for measuring Capital, Asset Quality, Management, Earnings, Liquidity and Sensitivity to Market Risk. The scale is 1-5, with 1 being excellent and 5 being headed for resolution.
** Economic Capital: This is a classical calculation of maximum probable loss for three buckets: lending, investing and trading. The assets are scored in a stressed scenario based on risk, including OBS exposures. We then sum the three MPLs to come up with Economic Capital. If the bank has more EC than regulatory capital, the business model is considered more risky, etc. JPM is 4:1. BAC and WFC are 2:1.
** Outlook: This is a purely subjective view of the immediate operating prospects for a given subject in view of current financials, and the market and economic environment, which we publish in the IRA Advisory Service.
Right now, the key tension for earnings visibility in the banking sector is between reserve build and charge-offs. Capital markets and non-interest income are very nice to have, but credit loss is the looming issue for the remainder of 2009. As a result, we downgraded US Bancorp (NYSE:USB) to “neutral” outlook from “positive” and kept Cullen/Frost Bankers (NYSE:CFR) unchanged at “positive” outlook. Earlier in the week, we added Webster Financial (NYSE:WBS) to the list with a “negative” outlook.
The Q1 profile for WBS from The IRA Bank Monitor way been viewed by clicking this link: wbs_q109
Below is our ratings matrix as of July 28, 2009.
| Ticker | Stress Rating* | Date | Outlook** | As of Date |
| GS | “A” | Q109 | Positive | Q2 09 |
| STT | “A+” | Q109 | Positive | 2008 |
| NTRS | “A+” | Q109 | Positive | 2008 |
| CFR | “A+” | Q109 | Positive | 2008 |
| BOH | “A+” | Q109 | Positive | 2008 |
| USB | “A” | Q109 | Neutral | Q2 09 |
| JPM | “B” | Q109 | Neutral | 2008 |
| BK | “A” | Q109 | Neutral | 2008 |
| BBT | “A” | Q109 | Neutral | Q1 09 |
| RF | “B” | Q109 | Neutral | Q1 09 |
| MI | “C” | Q109 | Neutral | Q2 09 |
| BAC | “B” | Q109 | Negative | 2008 |
| WFC | “A” | Q109 | Negative | 2008 |
| C | “C” | Q109 | Negative | 2008 |
| PNC | “A” | Q109 | Negative | Q1 09 |
| HSBC | “D” | Q109 | Negative | 2008 |
| STI | “F” | Q109 | Negative | 2008 |
| RBC | “F” | Q109 | Negative | 2008 |
| TD | “C” | Q109 | Negative | 2008 |
| FITB | “B” | Q109 | Negative | 2008 |
| KEY | “F” | Q109 | Negative | 2008 |
| COF | “C” | Q109 | Negative | 2008 |
| WBS | “F” | Q109 | Negative | Q2 09 |
| * Objective Stress Test rating for US bank units only | ||||
| ** Subjective view of forward operating results. | ||||
Source: The IRA Bank Monitor
Bottom line on Q2 numbers is that we heard nobody in the bank CSUITE even begin to suggest a peak in loss rates in 2009 during earnings calls. Indeed, most of the calls suggest that 2010 may be the peak and that the duration of losses could be extended. In both respects, this is very different from any post-WWII recession and is the main driver for our continued cautious outlook on everything save the most righteous bank names — like CFR, BOH, WABC.
Chris
July 30th, 2009 at 7:43 pm
Chris,
Do you think the banks are prepared for the coming Alt-A and Option ARM waves that will be going for the next few years? I haven’t heard much mention of this lately and we know it’s coming.
As an aside I met with a client a few hours ago that works in the card division at BAC, her words were that business internally looked “horrible” and not getting any better.
July 30th, 2009 at 7:59 pm
Excellent work Chris, as always. One shocker was HSBC with a ‘D’. I always felt they were the stronger bank but maybe not….
July 30th, 2009 at 8:44 pm
Amusing: http://www.dailygazette.com/news/2009/jun/07/0607_megabank/
July 30th, 2009 at 8:58 pm
Webster has my HSA
July 30th, 2009 at 9:00 pm
@ben22- the mortgage resets are coming until something like Q1/Q2 2011
July 30th, 2009 at 9:06 pm
Won’t low rates cushion some of the Option ARM reset? I have no idea if that is a stupid thing to ask or not, but I thought that was the whole idea behind QE and forcing down the longer part of the curve.
July 30th, 2009 at 9:52 pm
wes,
not according to the schedule I have, 2010 Option ARM and Alt-A resets begin, they get bigger in 2011 though, so maybe you are implying that it will take a while before it shows up, so I could see that, then again, if market conditions to get worse due to credit deflation the loans could be recast at a more rapid rate than the reset schedule.
spoonman,
current fixed rates might not be low relative to what the holder of the arm is paying among other a million other factors that help negate the impact of lower rates imo, and I don’t think thats a stupid thing to ask.
July 30th, 2009 at 11:38 pm
Simply go to images.google.com and type in
resets
hit and examine.
July 31st, 2009 at 12:02 am
hit RET of course.
more disappearing stuff thanks I suppose to wordpress.
As in
Let’s see if that appears.
July 31st, 2009 at 12:02 am
No it didn’t. This is wonderful.
July 31st, 2009 at 7:16 am
@ben22: “not according to the schedule I have, 2010 Option ARM and Alt-A resets begin, they get bigger in 2011″
Didn’t CR post something about how a large portion of those scheduled to reset in 2010/2011 have already entered default? If that’s the case, the losses will move forward.
Mr. Whalen:
This is very interesting. It’s too bad it doesn’t matter for the money center banks.
July 31st, 2009 at 7:56 am
Patfla,2009 is the eye of the storm between subprimes 2007/8 and options and AltAs 2010/11. I personally think the AltAs are the worst of a bad lot and if the 2010/11 vintages reflect purchases at the highest prices 2006/7 that is problematic too
July 31st, 2009 at 7:57 am
whoops forgot the site
http://www.jnkventures.com/images/MortgageRateResets.jpg
July 31st, 2009 at 8:05 am
@July 30th, 2009 at 9:52 pm, ben22-
we agree
perhaps my wording was ambiguous @July 30th, 2009 at 9:00 pm
the mortgage resets will occur continuously between now and Q1/Q2 2011. we are kinda at a lull right now, but resets will accelerate during the last half of this year, continuing through 2010 and climaxing in the first half of 2011 with the option ARMS (the dirtiest of the bad boy mortgages)
July 31st, 2009 at 8:18 am
To comment on HSBC, remember that the Stress Index ratings are just for the US units, so with RBS it is mostly First Citizens. HSBC has several units but remember that they have a heavy consumer focus like Citi. In fact, Citi and HSBC are good peers in terms of defaults, Loss Given Default and Exposure at Default (unused lines).
To the comment about money centers, they are zombies yes but the recovery values will vary greatly. WFC and BAC are toxic waste sites, but different. JPM is also very different. C is in process of resolution. Thus is does matter a great deal.
I have been saying that the debt-equity swap is going to be the flavor of 2010. Maybe Citi is the first test of this. We restructure Citi Holdings, where there are no banks please notice, and invite the bond holders to convert to recap the clean bank. Lower interest expense, higher TCE and a nice, clean utility that will hopefully have equity volatility < 100%.
July 31st, 2009 at 10:16 am
………is WBS toast?
July 31st, 2009 at 10:52 am
CR on defaults on Option ARMs reducing the potential number of recasts:
http://www.calculatedriskblog.com/2009/07/option-arms-good-news-bad-news.html
The new Credit Suisse chart:
http://3.bp.blogspot.com/_pMscxxELHEg/ShQKBEyAORI/AAAAAAAAFTM/03RNGrH9sEA/s1600-h/CreditSuisseResetMarch09.jpg
Though that chart has a flaw:
http://healdsburgbubble.blogspot.com/2009/05/reset-chart-from-credit-suisse-has.html
August 16th, 2009 at 8:26 am
[...] Chris Whalen wrote an interesting post today onOn Q2 <b>Bank</b> Earnings and IRA Ratings, Very Briefly | The Big PictureHere’s a quick excerpt [...]
August 26th, 2009 at 4:31 am
Check the rating scales at http://www.bank-ratings.net they’ve got some different but similar ones.