1,000 Banks Will Fail In Next Two Years
Posted by Stock Online Trader in Economy, Finance Sector on 10-08-2009
1,000 Banks Will Fail In Next Two Years
Paul Miller, Managing Director and head of financial institutions research at FBR Capital Markets, is well known in the investment community for providing in-depth, fundamental analysis and investment recommendations on thrifts and mortgage finance companies….
TWST: Are there any good stories out there?
Mr. Miller: In my coverage list, I don’t have any. But you have to really pick out small – some of the small, good community banks that have done very well. There is one that’s out there that I do not cover, it’s called First Niagara (FNFG), and it has been able to pick up some of the branches that PNC had to divest in the Nat City (NCC) deal. It’s in upper New York; they were very conservative, had a lot of capital on the sidelines and they raised capital for growth. And that’s the type of company that you want to look at – companies that are raising capital not to shore up their balance sheets but to take advantage of dislocations. It’s just one example. I think the Northeast area is the area that you can dig around to find some nice gems.
TWST: Is that because there are more community banks in that area than in other parts of the country?
Mr. Miller: Not necessarily. Every region has their unique flavor. The Northeast had its share of mergers, but the Midwest has unit banking, which created a ton of banks in Illinois and some other Midwestern states. And so you might say you have too many banks sitting out there – too many small banks that can’t overcome these crises. Illinois didn’t have a big run-up in its housing market, but yet it’s leading – one of the leading states – in bank failures because so many of its banks are just not big enough to overcome the crisis. I think every region is unique. There are 8,000 banks out there, of which probably close to a 1,000 will fail over the next couple of years. But I would think mostly the big failures have already taken place. On an asset side, it’s definitely going to be smaller but the numbers will be mind-boggling. Still, it really won’t mean a lot, if that makes sense.
TWST: To have all those small banks fail?
Mr. Miller: It’s not going to be as devastating as you think because the asset size will not be that big. You’re not going to have any more WaMus, which really caused a lot of panic in the system when they took place.
TWST: On the list you’re following, do you rate anything as a “sell” currently?
Mr. Miller: We have a few “sells,” more than I would like to have. We think Wells Fargo is very rich at these levels. We believe that their credit losses are coming slower in the late cycle, but they have not recognized the losses like some of these other companies have. So we are very concerned about Wells Fargo’s valuation, with it trading at three times book. It’s one of the highest-valued stocks that we have on our coverage list.
TWST: Are there any other stocks or any developing stories you are following that are worth noting?
Mr. Miller: Yes, the big issue that we are watching right now has to do with another foreclosure wave and the impact it will have. The foreclosure moratoriums really shut down foreclosures for six months, from last year up to March 31 of this year. Now that the foreclosure moratorium has been lifted, it takes about six months to take possession of a home and get it ready for sale. And so you are going see at the end of the year a hidden inventory start to come out putting what we think could be significant pressure on home prices. If so it would put another leg down on home prices. Now what we don’t know – which we hope, because nobody wishes for negative news on a constant basis – is that there is enough demand out there to buy up this excess inventory sitting on the banks’ balance sheets on foreclosed properties. If there is not, you could see some more downward home pricing pressure, which could have a self-fulfilling impact on people exiting the market, which would then see more pricing pressure on the downside than you really want to see in the market.
