'Who Is Next' lists 7 banks in 'danger zone'
San Francisco Chronicle
Kathleen Pender
Wednesday, July 16, 2008

Regional bank stocks, which got slammed Monday after the government took over IndyMac Bank over the weekend, recovered a bit on Tuesday. But concerns linger over what other banks could fail.

On Saturday, banking analyst Dick Bove of Ladenburg Thalmann & Co., released a report entitled "Who Is Next?"

The report said the banking system as a whole "is not anywhere near the danger that existed in the late 1980s and early 1990s despite all of the whining by public officials."

But the part of the report that grabbed the most attention was a list of banks and thrifts in what Bove calls the "danger zone."

Bove ranked the 107 banks and thrifts with more than $5 billion in assets by two measures of risk. (There are almost 8,500 U.S. banks and thrifts, but these 107 represent about 79 percent of industry assets.)

The first measure looked at each bank's nonperforming assets as a percentage of its loans at the end of the first quarter. Nonperforming assets include nonperforming loans, foreclosed assets and loans that are more than 90 days past due.

Bove said a ratio over 5 percent "represents danger." Yet only seven of the 107 institutions were over the 5 percent threshold.

The institutions (and their ratios) were Downey Financial (13.9 percent), Corus Bankshares (13.2 percent), Doral Financial (12.8 percent), IndyMac Bancorp (10.5 percent), FirstFed Financial (6.7 percent), Oriental Financial Group (6.12 percent) and Bank United Financial (5.4 percent).

IndyMac is by far the largest of these. Washington Mutual, one of the nation's 10 largest financial institutions, was 12th on Bove's list, with a ratio of 3.9 percent.

Bove's second chart looked at each institution's nonperforming assets as a percent of equity. On this list, a ratio above 40 percent is in the danger zone.

Eleven companies made this list: IndyMac was first, with a ratio of 146.2 percent. Next were Downey Financial, Doral Financial, BFC Financial, BankUnited Financial, Corus Bankshares, FirstBanCorp., FirstFed Financial, Flagstar Bancorp and Santander BanCorp. Last was Washington Mutual, at 40.6 percent.

Washington Mutual's shares are down 27 percent since Friday's close.

On Monday, the thrift released a statement saying it had recently raised $7.2 billion in capital. "The company significantly exceeds all regulatory 'well-capitalized' minimums for depository institutions. In addition, WaMu has current excess liquidity of more than $40 billion and a national franchise with approximately $150 billion in retail deposits," it said.

Downey Financial also issued a statement, saying its regulatory capital "was enhanced by $62 million prior to the end of second quarter 2008."

Of the two measures, Bove says the first is a better indicator of a bank's distress. "What we have seen, historically, is that (5 percent) is where banks tip over," he says.

James Abbott, a regional-bank analyst with Friedman Billings Ramsey, says this is one of many measures he looks at to determine if a bank is at risk of failure.

Other warning signs:

-- A bank that was offering above-average yields to attract deposits. "We call it hot money. It will follow whatever interest rate is the hottest," he says.

-- A relatively high level of uninsured deposits. These are likely to flee at the first sign of trouble.

-- A low level of asset quality. When depositors withdraw money, a bank has to sell assets to pay them off. The lower the quality of its assets, the less money it will get and the more likely it will fail.

-- Low levels of equity. The more equity it has, the longer a bank can withstand a run.

If one of the nation's biggest banks were to face a run, the government would find a way to keep it going under the "too big to fail" concept. In this case, insured and uninsured depositors would both be protected.

Regional bank stocks have been hard hit since the IndyMac collapse in part because they are not too big to fail.

There is no line that separates banks that are too big to fail from those that are not. Bove says the five largest - Citigroup, Bank of America, JPMorgan Chase, Wachovia and Wells Fargo - are clearly too big to fail. He says the next 20 largest are probably too big as well.

We can now presume that anything smaller than IndyMac will be left to fail. Bove says IndyMac is the nation's 30th-largest bank holding company by assets. The FDIC, which ranks individual banks and thrifts, ranks it 52nd.

For banks in between, I guess we'll just have to see.

Net Worth normally runs Tuesdays, Thursdays and Sundays. E-mail Kathleen Pender at kpender@sfchronicle.com.

This article appeared on page C - 1 of the San Francisco Chronicle

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