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Archives of the Sept. '08 $700 Billion Bailout 9.17.08 to 10.03.08: "The complete archive of notes and original analysis on the $700 Billion bailout; from its introduction to final passage."
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Warning! 9.21.08: "The stock market is on the brink of total collapse. We could see DOW 8000 immediately, and much, much worse..."
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Click here for an Updated! Analysis of CA Bank Earnings -Highly Recommended!
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. Earnings Analysis of California Banks and Foreclosure Update Home Page
Here is an informal analysis of some local California banks. We need to see the following trends occur before even considering a home purchase:
1. Improvements in local bank earnings, Q by Q (liquidity). They have decreased significantly over the past 2 quarters, with no indication of recovery.
2. A measurable decrease in foreclosures, and a reduction in inventory (supply). April '08 was a 2 year record for new home starts - more inventory being added.
Bank earnings reflect a financial institution's willingness to extend credit to potential buyers. Therefore, bank earnings indirectly influence a homes liquidity and valuation. When something cannot be easily sold, its value can be brought into question. During the housing boom years, loose lending policies brought about record price appreciation. It's hard to imagine another run up in housing like we saw before any time soon. Why? There simply wont be a buyer pool like before. Damaged credit scores, tighter banks, and reluctant speculators will keep prices down for a decade or more.
Below the chart shows the Bank name, Quarter 1 08 earnings, Q1 last years earnings, and the Q4 2007 earnings:
Bank Q1 Q1 Last year Q4 2007 Q2 Estimate Q2 Actual ............ ............ *Canyon National Bank .02 .44 .17 .10 .06 *East West Bank .08 .68 .59 .09 -.41 Pacific West .05 .09 x .01 City National .91 1.15 .96 .82 .73 Union Bank .79 1.07 .78 .92 .94 Bay Commercial Bank .07 .13 x .11 Coast Bancorp .22 .30 x x .04 Countrywide -1.60 .72 -.79 x x Bank of America .23 1.16 .05 .53 .72 US Bancorp .62 .63 .53 .60 .53 Cathay Bancorp .55 .58 .62 .44 .39 Preferred Bank .34 .61 .57 .30 .00
UPDATE 9/12/2008> Q1 2008 to Q2 2008 Analysis:
For the most part, the banks in general still managed to profit in Q2; although most of the smaller banks missed. There are still many major concerns going into the Q3 earnings season reports.
Firstly, commercial property is starting to weaken, with the economic slowdown. This is not just a symptom of the housing market downturn, but a reluctant to spend consumer. Less consumer buying means commercial tenants aren't making money. Commercial tenants not making money means rents are late or not paid. Unpaid rents means empty building with "for lease" signs in the window, and eventually property owners and their over leveraged real estate will be forced into defaulting their loans. Meanwhile, housing is not expected to recover and could be caught in a long, multi year price stabilization process. Not good for banks.
The Consumer slowdown is evidenced by the retail report today (9/12/08) The Commerce Department reported that retail sales fell by 0.3 percent in August, a much weaker showing than the 0.3 percent rise that economists had been expecting. Additionally, The Labor Department reported Friday that wholesale prices fell 0.9 percent last month, nearly double the 0.5 percent decline that economists had been expecting. This is a symptom of deflation: and a harbinger of bad times for the banks.
Deflation is the worst possible scenario for banks, as asset price declines are set against fixed valuations that loans are based on. More and more people may realize that they could walk away form loser mortgages and the prices may never come back to what their loan is based on. Meanwhile, there is still taxes, HOA's, utility assessments, etc to pay; on the banks. It's not just the paper loan losses, where the funding was created by banks out of thin air. Now they own these homes through foreclosure, and they are on the hook for the added fees of home ownership. Doesn't take a genius to figure out the foreclosure process will be slowed to a crawl; and these fees left out in no mans land; i.e. no one pays them.
Secondly, with the noticeable drop in deposits among the smaller banks, the larger banks are inevitably benefitting. With the Indy Mac bailout taking roughly 10% of the FDIC reserves (!), and recently the Fanny Freddy bailout, and now Lehman and most likely Merrill Lynch on the slab...what's next? I would look at what banks are making money and put your money there; move out of smaller banks and into firms like Union Bank, Wells Fargo, or City National. That is, unless you feel like fighting the FDIC to get your money; my concern is that their reserves may delay processing if there is simultaneous bank failures; which is very possible now. Stick with the large banks, avoid Bank of America because they are gambling heavily on a recovery; and are heavily exposed to the housing market.
See Article: Question: "Should I invest in a house now? The market seems to be bottoming out..." Click here for the answer
Q4 2007 to Q1 2008 Analysis:
An analysis of the chart shows that earnings have begun their deterioration in the close of 2007, and dropped significantly in Q1 '08. Q2 estimates cannot be given any credibility: The degree of the Q1 misses reflects that even the banks don't know what their exposure may be. The good news is many of the banks are still making money: but the sudden and hard downward trend in earnings just in the past quarter is a major concern. If the earnings implosion continues, these banks could slide into the negative.
'Runs on the bank' will also adversely effect a banks willingness to lend. Many higher end depositors who previously had more than $100,000 in smaller banks are moving that money to the larger investment houses. Good for the JP Morgan's and online trading sites, like TD Ameritrade: Not so good for the smaller local banks that depend on these deposits to survive. This exodus of depositors has been occurring in the past few months, not reflected in earnings reports yet. I speculate that the smaller bank's 'total deposits' numbers will be down significantly for Q2 '08. Less deposits, In addition to increased foreclosures and defaults and greater inventory, will exacerbate the housing crisis in California.
Glimmer of Hope?:
On a positive note, some of the larger cap banks appear to be recovering Q4 '07 to Q1 '08. Bank of America went from .05 (Q4 '07) to .23 (Q1'08) a share; Union Bank of CA improved a penny, and US Bancorp went from .53 Q4 to .62 in Q1 '08. Some concerns are that these improvements may be spooked money moving from the smaller banks, and not attributable to housing market improvements. Before we make any conclusions on this positive trend, we must see recovery to the smaller regional banks, and consistency in Q2 and Q3 results. We are waiting for the Q2 '08 results to see if a trend occurs.
Here is why we don't trust this improvement data: on 5.14.08 it was reported that April saw 65% more foreclosures than last April. On 5.16.08 a report says new home and apartment construction up in April, the highest in two years. Without a reduction in current inventory or increased sales, this just means more product hitting the market. Currently at 11 months of inventory, possibly going as high as 18 months inventory. 5.26.08 report US home sales dropped over 14% in Q1 '08, slated to drop an additional 20-25% until a possible bottom. On 5.17.08 Forbes AOL listed California metro areas are set to drop at least another 19% more this year: Riverside-San Bernardino tops the list...
Conclusion? To many adverse economic conditions exist in California that can weigh on future earnings. We cannot give too much credibility to the implied 'recovery trend' inherent to the Q4 '07 to Q1 '08 results at this time.
Noteworthy: Update 05.29.08
1. CYNA.OB.- Canyon National Bank: A local community bank in the Coachella Valley. Q1 expected earnings were .28 per share, ACTUAL was .02 per share, a whopping 92.9 % miss. They estimate .11 a share for Q2, against .42 a year ago. This shows how bad things are in the California inland empire.
2. EWBC East West Bankcorp - California regional, so Cal larger cities. Q1 expected earnings were .46 per share, ACTUAL was a dismal .08 per share.
3. Preferred Bank dropped about 45% from Q4 2007 to Q1 2008. Cathay bank dropped about 16%: both have loan portfolios almost exclusive to the California housing market.
4.May 29, 2008 Update 05.29.08 Estimates cut on banks with significant exposure to California housing market: Cathay, Preferred, East West Bank named: See Article (Marketwatch).
California Foreclosure & Inventory Update: Home Page
UPDATE 5.14.08:: US foreclosures have surged 65% from a year ago in April. California, Nevada, Florida, Arizona are the hardest hit. Combined with gas prices and inflation, this spells more price pressure on housing. No signs of trend reversal at this time.
UPDATE 5.16.08 On 5.16.08 report says new home construction up in April, the highest in two years. Without a reduction in current inventory or increased sales, this just means more product hitting the market. Currently at 11 months of inventory, possibly going to 18 months inventory.
UPDATE 5.23.08 Unsold homes in US rise to 23 year high.
UPDATE 5.26.08 US home sales dropped over 14% in Q1 '08. US home prices see biggest drop in 20 years in Q1 '08.
Written by: The Sniper
. © 2008 Realtech Partners, Inc. All Rights Reserved. Email.
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**ARTICLES**
. Q1-Feb 10 '08: - The Perfect Storm of American Economic Downfall Q2- '08: So what do we do now? .. .. Q1-Feb 21 '08:- The Counter Intuitive Market Force: But Housing is the Exception Q2- '08: Analysis of CA Bank Earnings . Q1-Feb 21 '08:- The 5% Income Rule Q2- '08: Bearish on Housing.... Bullish on Stocks .. ... Q1-Feb 21 '08:- A Compelling Argument for Alternative Investments Q2- '08: Riverside-San Bernardino tops the list... .. ... Q1-Feb 26 '08: True Market Analysis, or Self Interest? Q2 '08: - Oil and war speculation . ... Q1- '08: No Recession, but Deflation? Q2 '08:- Bank of America & Countrywide: A signal of a housing bottom? .. ... 3.17.08: Next for the Economy: The Greatest Bull Run in History? .. Q2- '08: The Schizophrenic FED Gambit
Written by: The Sniper
DISCLAIMER: Not associated with any city, county, civil entity, or government body. No warranties are stated or implied. Use at own risk. External web sites are not endorsed. Users agree to all terms. These articles merely reflect the opinions of this author and are by no means a guarantee of future economic conditions. Though the author strives to provide accurate and relevant data, he sometimes relies on external sources and cannot assure the reader of the accuracy contained within. These articles are provided for information purposes only and are not meant to provide investment advice to anyone. Please consult with your professional financial planner for investment advice.
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