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c1ue
10-04-07, 04:51 PM
With the recent spike up in bank and financial company stock prices due to "losses being less than feared", it might be useful to look at what these losses really mean.

As I noted previously, JP Morgan's Tier 1 capitalization ratio is under 8%

http://www.jpmorgan.com/cm/ContentServer?cid=1102380208957&pagename=jpmorgan%2Fts%2FTS_Content%2FGeneral&c=TS_Content

From the link above, you can see that even within recent history it was around 8%, and the 7.79% ratio was BEFORE the August crunch hit.

This isn't so bad; Wells Fargo is at 7.9%, BofA at 8.52%, Citigroup at 7.9% through Q2 2007.

Of course, it is always instructive to look at historical Tier 1 cap ratios to compare, say again FY2002:


Bank Cap Ratio in 2007 Cap Ratio in Q3 2002
JP Morgan 7.79% 8.6%
Wells Farg 7.9% 7.84%
Bank of America 8.52% 8.13%
Citigroup 7.9% 9.5%


The point is not the ratio itself, but in the rate of change of the ratio (if any). As can be seen, some banks are experiencing significant cap ratio changes - whether this is due to bad loans or something else still remains to be seen.

GRG55
10-05-07, 03:27 AM
With the recent spike up in bank and financial company stock prices due to "losses being less than feared", it might be useful to look at what these losses really mean.

As I noted previously, JP Morgan's Tier 1 capitalization ratio is under 8%

http://www.jpmorgan.com/cm/ContentServer?cid=1102380208957&pagename=jpmorgan%2Fts%2FTS_Content%2FGeneral&c=TS_Content

From the link above, you can see that even within recent history it was around 8%, and the 7.79% ratio was BEFORE the August crunch hit.

This isn't so bad; Wells Fargo is at 7.9%, BofA at 8.52%, Citigroup at 7.9% through Q2 2007.

Of course, it is always instructive to look at historical Tier 1 cap ratios to compare, say again FY2002:


Bank Cap Ratio in 2007 Cap Ratio in Q3 2002
JP Morgan 7.79% 8.6%
Wells Farg 7.9% 7.84%
Bank of America 8.52% 8.13%
Citigroup 7.9% 9.5%


The point is not the ratio itself, but in the rate of change of the ratio (if any). As can be seen, some banks are experiencing significant cap ratio changes - whether this is due to bad loans or something else still remains to be seen.

C1ue: Well this shows pretty clearly that banks are heavily levered businesses, and it doesn't take much of a change in collateral values to wipe out all the shareholder equity.

I've read your historical posts on the subject on other threads.

My questions: Do you now think that they have brought all their liabilities onto their balance sheets already? Citi for example was alleged to have major off-balance-sheet SIV liabilities.

How on earth are they valuing the illiquid instruments, and should we believe those valuations?

How much has been temporarily moved off the balance sheet to the Fed through Discount Window operations - that would therefore not appear at Quarter End? Is this amount (if any) material or just a red-herring compared to total bank capitalization?

The opportunity for banks to play lots of "games" with their financial statements seems quite high. And it also seems the Fed is relaxing various banking regulations in order to smooth things over during the collateral crunch (for example the ability of Citi et al to lend to their brokerage arms) - that itself should cause investors some indigestion.

These are the primary reasons I have great difficulty seeing the financials as bargain investments - I am still convinced they may be only an intelligent speculation, at best, for now.

You, and others on iTulip, obviously study them in much more detail, and I am interested in current insights on this sector and views on the questions above. :confused:
Thanks, GR

c1ue
10-09-07, 01:16 PM
GRG,

Sorry, been busy with my prospective (now real) customer for the past week.

I'd suggest looking at Minyanville's Minyan Peter, he has some good examples on what to look for.

But in answer to your questions above:


My questions: Do you now think that they have brought all their liabilities onto their balance sheets already? Citi for example was alleged to have major off-balance-sheet SIV liabilities.

No.

Let me rephrase: HE*L NO

Citi has at least $100B in these SIVs.

If we look at Citi's recent writeoff:
The largest U.S. bank said it will write down about $1.4 billion of its $57 billion portfolio of highly leveraged loans, lose about $1.3 billion on the value of securities backed by subprime loans, and lose $600 million in fixed-income credit trading.

You'll note none of the SIV losses are included. Of course, it IS possible Citi has not lost a dime, but then again, maybe not.


How on earth are they valuing the illiquid instruments, and should we believe those valuations?

Take finger from behind, hold up in air.

The valuations on the SIVs are still in the mark to model stage and will stay there as long as possible.


How much has been temporarily moved off the balance sheet to the Fed through Discount Window operations - that would therefore not appear at Quarter End? Is this amount (if any) material or just a red-herring compared to total bank capitalization?


Unless $90+B in discount window operations has slipped by without me or anyone else noticing, I'm pretty sure the $6B or so Citi has taken out of the discount window is not significantly impacting their potential SIV liabilities. Note that Citi has securities far in excess of what is in the SIVs as well.

If we just take Citi's word for it, there is at least $157B in highly leveraged loans and SIV contents.

But then again, the entire category of corporate loans is suspect. All financed LBO/PE type deals where the debt cannot be sold, will end up getting moved to 'assets'. The SIVs also are off balance sheet - should there be enough losses to force recapitalization then these also will move onto Citi's balance sheet as 'assets'.

These activities in turn will force up reserve requirements or else the cap ratios are going to attain 'illegal' levels.

This is exactly the type of activity that can precede a bank failure - and there are a number of smart public personages who have been predicting a major bank to fail. I don't think it will be Citi, but definitely Northern Rock is not the one.

GRG55
12-08-07, 01:04 AM
When the politicians crafted NAFTA, I'm sure this isn't what they had in mind. The oligopoly called the Canadian banking system demonstrates, yet again, that extraordinarily foolish and reckless behaviour in the sector is by no means concentrated in Lower Manhattan. Based on numerous past experiences, the Canadian Federal Government is even more prone to fling around tax dollars to bail out its precious banks (without hesitation) than the USA.


So put me on a highway
And show me a sign
And take it to the limit one more time

---The Eagles, 1975---

At CIBC, the bad old days are back


McCaughey delivers a record year, but $9.8-billion in exposure to subprime market shows risk-prone culture hasn't been erased

NEW YORK, TORONTO -- This year was meant to provide the capstone on Gerry McCaughey's quest to turn around the fortunes of Canadian Imperial Bank of Commerce. Annual profit was on pace for a record. The balance sheet was strong once again, and capital levels were high, meaning CIBC might finally be ready to follow its peers into the U.S. retail market. Most importantly, investors were beginning to believe Mr. McCaughey had righted the accident-prone bank, and eradicated a cowboy culture that has led to several costly - and embarrassing - problems.

They believed it until yesterday, anyway, when CIBC resurrected its well-worn reputation as the bank most likely to walk into a sharp object. The bank confirmed it has $9.8-billion (U.S.) worth of hedged exposure to the crumbling subprime mortgage market, and warned it could suffer "significant future losses" because of these positions. That number, which doesn't include an additional $741-million worth of unhedged exposure, was far greater than predicted, and several times higher than any of the other Canadian banks...

..."Commerce unfortunately has a propensity to step in every pothole that there is along the road, and we were disappointed, as I guess the market was obviously too, with what's happened," said John Kinsey, a portfolio manager with Caldwell Securities Ltd. "I really don't want to come out flatly and say that it's bad management, but I mean it has to be something when you consider their record against the other four major Canadian banks. It's by far the worst and, as I said earlier, if there is a pothole in the road they just seem to be able to hit it."

"It pretty much looks like it's another Enron," lamented one analyst, who said the bank has a propensity to live up to even the more dire rumours in the marketplace. "All we need to do now is just walk up and down the street and any story we hear about CIBC is correct. They don't need an investor relations department - we'll just call up the hedge funds."

http://www.theglobeandmail.com/servlet/story/LAC.20071207.RCIBC07/TPStory/Business?pageRequested=all&print=true (http://www.theglobeandmail.com/servlet/story/LAC.20071207.RCIBC07/TPStory/Business?pageRequested=all&print=true)



CIBC Shares Slide Further on Subprime Hedge Woes

Fri Dec 7, 2007 6:02pm EST
By Lynne Olver
TORONTO (Reuters) - Shares of Canadian Imperial Bank of Commerce continued to slide on Friday, a day after the bank admitted that its credit positions tied to U.S. subprime mortgages were too large and it may face "significant" losses on hedged positions.

A slew of analysts cut their price targets or recommendations on CIBC stock.

The bank, Canada's fifth-largest, revealed that it has exposure to billions of dollars worth of hedged derivatives linked to U.S. mortgage-backed securities, including deteriorating subprime mortgages.

"We believe that CIBC's stock will remain cheap relative to peers while the environment surrounding U.S. residential lending and financial guarantors remains clouded," RBC Capital Markets analyst Andre-Phillippe Hardy said in a research note on Friday. Hardy cut his CIBC price target to C$95 a share, from C$105.

CIBC shares were down 3.2 percent at C$79.71 on Friday afternoon, on the heels of a 5.4 percent tumble on Thursday, when details about the bank's subprime exposure and potential losses overshadowed its quarterly results.

The stock has become the worst performing Canadian bank stock in 2007. CIBC shares have lost 19 percent of their value year-to-date, outstripping National Bank of Canada's 18 percent drop.

CIBC said on Thursday that the notional value of its hedged portfolio of U.S. mortgage-related securities was C$9.3 billion, or US$9.9 billion, on Oct. 31. It said the fair value of the hedged contracts was C$4 billion, or US$4.3 billion. The bank had previously not given information about its gross exposure, only its unhedged exposure.

The key risk is that certain counterparties to the hedges -- bond insurers -- may be downgraded by credit rating agencies, or may fail outright, Genuity Capital Markets analyst Mario Mendonca said in a research note.

If bond insurers are downgraded, they may face "debilitating" collateral calls from counterparties or be unable to honor their guarantees, Blackmont Capital analyst Brad Smith said in a research note.

The potential hit to CIBC from various counterparty scenarios could be anywhere from US$1.1 billion to more than US$2 billion, various analysts said, but the bank would still have adequate capital on hand.

Questions were raised about why such a big part of CIBC's portfolio was hedged with just one counterparty, which currently has a single-A credit rating but is being reviewed for possible downgrade.

CIBC did not name this counterparty, but analysts said there is little doubt that it is ACA Capital Holdings. ACA is the only single-A rated financial guarantor currently under credit watch with negative implications, noted Rob Sedran, an analyst at National Bank Financial.

ACA's stock has been halted on the New York Stock Exchange since late November, and it is down 93 percent in the last six months. Standard & Poor's said on Nov. 9 that it was looking at cutting ACA Financial Guaranty Corp's rating.

"We are flabbergasted that CIBC would hold US$3.5 billion in notional counterparty risk to this company," BMO Capital Markets analyst Ian de Verteuil said in a research note.

On a conference call on Thursday, CIBC President and Chief Executive Gerry McCaughey said, "It's now clear that the combination of having a concentrated exposure to a single-A rated counterparty in a significantly stressed market is not a position that we would choose to be in."

But the underlying securities in that hedge were highly rated, and the "structuring features" that normally were expected to provide protections "have not functioned the way that we thought in a significantly stressed marketplace," McCaughey said.

The bank is not doing that type of "intermediation" business between counterparties any more, he said.

c1ue
12-09-07, 09:55 AM
And don't forget the added bang of having the dollar asset also depreciate due to C$ gain.

Gotta love them CIBC knuckleheads.

GRG55
12-10-07, 07:38 AM
Another day, another bank announcement...(yawn)

Only this time it's the Swiss selling off one of their banks to the Asians and Arabs... :eek:

Good grief!!! What next? The Chinese take over Patek Philippe - instead of just making the fakes...


UBS to Sell Stakes After $10 Billion in Writedowns
By Elena Logutenkova
Dec. 10 (Bloomberg) -- UBS AG will write down U.S. subprime mortgage investments by $10 billion, the biggest such loss by a European bank, and replenish capital by selling stakes to investors in Singapore and the Middle East.

Europe's largest bank by assets plans to raise 13 billion francs ($11.5 billion) selling bonds that will convert into shares to Government of Singapore Investment Corporation Pte. and an unidentified Middle Eastern investor, Zurich-based UBS said in a statement today.

UBS scrapped a forecast for a fourth-quarter profit and said it may post a full-year loss. The collapse of the U.S. subprime mortgage market has led to about $76 billion of losses and markdowns at securities firms and banks this year. UBS rose as much as 2.6 percent in Zurich trading after the bank followed Citigroup Inc., the largest U.S. bank, in taking on strategic investors to bolster capital.

``UBS was quite clever this time to couple some extremely bad news with some good news,'' said Dieter Winet, who helps manage about $50 billion including UBS shares at Swisscanto Asset Management. ``It's positive that capital is placed in firm hands. This will help restore trust in private banking and asset management and help UBS write new business.''

UBS shares were up 1.5 francs to 58.7 francs by 11:31 a.m., after initially dropping as much as 3.4 percent. The shares have fallen 19 percent over the past 12 months, erasing about 25 billion francs of the bank's market value.

Singapore's GIC, which oversees the island nation's foreign reserves of more than $100 billion, will invest 11 billion francs in UBS for a 9 percent stake. The Middle East investor will put in 2 billion francs...

...``Because there's a lot of liquidity in those countries and those sovereign wealth funds, they'll be looking for investment opportunities,'' said Masafumi Oshiden, a Tokyo-based fund manager at BlackRock Japan Co., whose parent company holds $1.1 trillion in assets. ``The valuations have come down a lot.''

UBS also plans to sell 36.4 million treasury shares that it previously intended to cancel, raising about 2 billion francs, and proposed replacing the 2007 cash dividend with stock, boosting capital by 4.4 billion francs.
The convertible bond sale and dividend change must be approved by an extraordinary shareholders meeting in mid-February, the bank said.

UBS plans to raise a total of 19.4 billion francs through all the measures, which will improve its so-called Tier 1 capital ratio to more than 12 percent from 10.6 percent on Sept. 30...

...``An investment bank can and will incur losses,'' Rohner said. ``But it should never drag the whole group into loss-making territory. Wealth management clients don't like this uncertainty.''...

Link to full article:
http://www.bloomberg.com/apps/news?pid=20601087&sid=amnXtGeq8oAs&refer=home