Are BofA, Wachovia Readyto Weather Financial Crisis?

By Rick Rothacker, The Charlotte Observer, N.C.

Jul. 15–Investors pummeled bank stocks on Monday as new jitters about the health of the financial system erupted ahead of another round of miserable earnings reports.

The latest slide came despite regulators’ efforts over the weekend to calm roiled financial markets as well as rattled bank customers.

At Charlotte’s big banks, Wachovia shares plunged nearly 15 percent to $9.84, a level last seen in 1991. Bank of America shares dropped about 7 percent to $20.15, around an eight-year low. Both are scheduled to disclose dismal second-quarter earnings next week, making it four straight ugly reports.

The agency that insures deposits emphasized that most banks are "safe and sound" despite the sudden closure Friday of IndyMac Bancorp, once a top 10 mortgage lender. Both Charlotte banks also stressed their financial strength.

Even as regulators worked to backstop mortgage giants Fannie Mae and Freddie Mac, the failure of California-based IndyMac showed that not all institutions will be propped up, raising concerns about the possibility of more bank failures. IndyMac, which specialized in riskier low-documentation mortgages, opened Monday under the control of the Federal Deposit Insurance Corp.

FDIC chairman Sheila Bair issued a statement Sunday downplaying the IndyMac failure, noting most of the company’s deposits were fully protected. "The overwhelming majority of banks in this country are safe and sound," she said. "The chance that your own bank will be taken over by the FDIC is extremely remote."

One of the country’s more distressed regional banks, Cleveland-based National City saw its shares fall more than 20 percent Monday before the company issued a statement saying it was "experiencing no unusual depositor or creditor activity." Its shares ended the day down nearly 15 percent.

Virginia-based bank consultant Bert Ely said IndyMac’s situation was different than that of deposit-rich banks such as Bank of America and Wachovia, noting IndyMac was essentially a one-product company known for its risky loans.

Bank of America spokesman Scott Silvestri said the company is "one of the most stable and liquid banks in the world." Wachovia spokeswoman Christy Phillips-Brown said the bank "is a strong and stable financial services company."

In the first quarter, the FDIC reported 90 banks with $26 billion in assets on its "problem list," a small percentage of the nearly 8,500 insured institutions. That’s up from recent lows but compares with more than 1,400 problem institutions with more than $800 billion in assets at the height of the 1990-1991 recession.

While IndyMac was clearly distressed, its abrupt failure was surprising, said Miami-based bank consultant Ken Thomas. The FDIC does not identify the names of problem banks but with $32 billion in assets it could not have been on the agency’s list, he noted. The lender’s failure shows the importance in these times of "liquidity" — cash on hand and cash that can be easily obtained.

Both Bank of America and Wachovia have stressed their strong liquidity levels during the credit crisis now close to a year old. Bank of America has said that as of March 31 it could fund operations for 20 months without access to the markets. Wachovia said it has been a provider of liquidity to other financial services firms.

Analyst Dick Bove of Ladenburg Thalmann also issued a report on Monday with data showing that the banking industry’s ratio of bad loans to outstanding loans is less than 2 percent, less than half the heights reached in the early 1990s. Bove put Bank of America’s ratio at 1.41 percent and Wachovia’s at 1.91 percent. "A ratio above 5 percent suggests danger," he wrote.

Reports should shed light

IndyMac’s failure came just as worries were mounting about the stability of Fannie and Freddie.

These so-called government-sponsored entities fuel the mortgage market by buying loans from lenders, freeing up their capital to make more loans. Treasury and the Fed announced a series of moves Sunday designed to stabilize these institutions, including expanding their borrowing limits. Their troubles raise worries for the broader mortgage market, but Ely, the bank consultant, did not see specific fallout for Charlotte’s banks.

Investors will get a better picture of the state of the financial sector when banks, including New York’s JPMorgan Chase and Citigroup start reporting second-quarter earnings this week. Bank of America reports Monday, followed a day later by Wachovia.

In recent weeks, analysts have been lowering their profit estimates for both Charlotte banks, citing rising loan losses and writedowns related to mortgage-backed and other investments. Both banks also face questions about whether they need to cut their dividends or raise capital, moves that would further harm shareholders.

Citigroup analysts last week lowered second-quarter profit estimates for Bank of America to 51 cents per share, compared with $1.29 per share last year. Analysts also will be watching for an update on the bank’s Countrywide Financial acquisition. Chief executive Ken Lewis may have eased some anxiety when he said after a speech last week that he didn’t currently see a reason to cut the bank’s dividend.

As for Wachovia, the bank forecast a quarterly loss of up to $2.8 billion last week, not including a noncash accounting charge, at the same time it announced the appointment of new CEO Bob Steel, a former U.S. Treasury Department official. UBS analysts recently predicted the bank will post a loss of $1.98 per share for all of 2008, compared with a gain of about $3.26 per share in 2007.

The bank has said it will disclose more information about cost-cutting initiatives and efforts to reduce its mortgage exposure. Steel said last week that he wants to build a "strong and independent" company, but speculation continues that Wachovia could become a takeover target.

After earlier predictions that the industry and the U.S. economy would see a mild revival in the second half of 2008, analysts are now expecting the gloom to continue for a while. "Our view is that the credit crisis will extend well into 2009," Oppenheimer analyst Meredith Whitney wrote recently, "and perhaps beyond."

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