Wait for August FFIEC Call Reports Before Taking a Long Position in Banks

Nearly every major commercial bank has reported earnings over the last week.  The results have ranged from an $8.8 billion dollar loss at Wachovia (WB) to a $3.4 billion dollar profit at Bank of America (BAC).  The bank’s capital ratios have stayed adequate for the most part, even if it has meant changing the charge off procedure, as in the case of Wells Fargo (WFG). 

The perceived improvement, or for that matter the perception that the losses have peaked, has caused one of the greatest short-term rallies in the history of financial stocks.  Yet, I still worry that the hardships facing the commercial banks are nowhere near complete and as a result the current rally will prove to be merely a painful remainder of how much further the bank stocks have to fall to account for the near continuous addition of delinquent loans to their books.

I strongly believe that the amount of loans that are between 30 and 89 days delinquent are a great indicator of future issues in any banks’ loan portfolio.  Unfortunately, these figures are never included in the banks' quarterly press release and are rarely included in the banks’ 10-Qs.  As a result, individual investors must search out the call reports put out by the FFIEC, these reports can be found here, it should be noted that these reports show the health of the bank only and not the holding company.  These reports are tremendously detailed and allow for a much more detailed examination of any banks books. 

The one drawback however is that the banks typically take over a month to file the reports; as a result, investors are left in the dark in the time period immediately following the standard quarterly release.   For long term investors, I believe that it is imperative that one waits until the call reports are filed with FFIEC in early to mid August before taking a position in any bank, as we will then be able to see the trouble that the banks have gotten themselves into over the summer.  As of 3/31/08 the following major banks had a substantial number of loans that were 30-89 days delinquent:

Wachovia (WB): In excess of 5.3 billion

Washington Mutual (WM): In excess of 5.2 billion

Wells Fargo (WFC): In excess of 5.4 billion

Bank of America (BAC): In excess of 8.3 billion

JPMorgan Chase (JPM): In excess of 6.9 billion

U.S. Bank (USB): In excess of 1.3 billion

Citigroup (C): In excess of 13 billion

These figures should remind us that there are still considerable losses in the pipeline, on top of those loans that will become delinquent in the second quarter.  As banks do not have to start reserving for losses in these loans until after 90 days it is possible that the worst is yet to come for these banks, especially if a significant number of loans become delinquent over the summer.  

Generally speaking, these loans do not start to bring about a deterioration in the capital base and capital ratio of banks until after 90 days.  The possibility of increased delinquencies and the potential capital raises that could follow is why I would advise waiting until the 2Q call reports come out in mid August before investing in any bank stock. 

I have talked a little bit about how these early delinquencies can be included in calculations to figure out the strength of a particular bank here, I believe my article on a potential “California Ratio” is worth a review going into the release of the 2Q call reports.  Especially if one is considering taking a long term position in one of our country’s many regional and national banks.

For Further Review: FFIEC Website

Disclosure: None

Comments

[wintertree]

"The perceived improvement, or for that matter the perception that the losses have peaked, has caused one of the greatest short-term rallies in the history of financial stocks."

Hardly. The past week's price hikes resulted from the emergency rule banning naked short selling in many financial stocks. If you look at USB, for example, there was no real "rally" because during the few weeks before the rule went into effect, USB's pps had declined a ludicrous $13, for no reason other than a massive increase in short positions. Despite what you mistakenly call a rally, USB has not yet recovered its price of a month ago. Your story is misleading, making me suspect that you are a fan of short selling, including naked short selling: it makes your speculations more "prudent".

[Norm theFed-up]

This is a first.....no doom and gloom....just the facts and a strong recommendation to do your homework before you dive in. I've been long in bank preferreds for years and I'm getting killed. Can't bail because I need the income stream...I'm retired....and I can't turn the paper losses into real ones. Here's hoping for no imminent defaults. But I have nothing but kudos for the author on this one. I think his facts are not sensationalism, just the truth, and his advice is good. Nice work....for a change!!!!!!!!!!!!!!

[Bob fromMontreal]

I am in the same situation as Norm, so I understand. But when all this mess will be cleaned up there will certainly be some winners. I mean people will still need banks and will tend to go to safe/strong institution. The question everybody should ask now is 'who will be the winners? The time it will take to recover is less important as long as you keep receiving the dividend you need for living. Personnaly I put my bet on Bank of America.

[nyka]

I strongly believe that the NUMBER (not amount) of loans between 30 and 89 days delinquent...Kill the THAT ARE. Tighten your writing; reduce your dependence on linking verbs (is, are, was. were). They are considered "dead, lifeless" verbs.

I believe that ---we know you believe that; thus, it's wordy

[Gabbar]

I donwloaded the FFIEC data for Wachova.
Can you tell us, where to look for the piece of information mentioned in this article

Thanks
G