XLF, Banking and Financial Sector Stocks

Top 159. Jun 17, 2002 7:36 AM

» Kirk - Thruhiker ->Re:BTO Not a long term investment

.
In response to message posted by Thruhiker:

In Dec. 1999 you wrote of BTO in this thread:

BTO is not a long term investment for me. As Kirk pointed out, there are good funds with lower expense ratios. I believe the current discount is excessive and will narrow next year when the sector comes back into favor. Its 8 bucks a share. I'll revisit this discussion a year from now if we're all still here (or when I sell if prior to then) and compare it to the performance of the total market index.

BTO pays a hefty dividend so you have to show reinvested returns

What a good pick! It seems your BTO turned out better than the others. Did you add when it continued lower or did you stop out to limit losses? If you held, did you lock in the gains last year or do you still hold?

In addition to a good chunk invested into XLF, I put a small chunk into FSRBX and added to it when we saw further weakness. This has beaten my XLF but your BTO is the clear winner.

Anyway, that was sure a great pick!

-- posted by Kirk

Bank Stocks Take Outsize Beating

Top 160. Jul 23, 2002 12:14 AM

» JenL_2 - Bank Stocks Pummeled

This from 7/22 TSC....

By Matthew Goldstein
Senior Writer

A perfect storm of bad news is punishing bank stocks, with shares of Citigroup (C:NYSE) and J.P. Morgan Chase (JPM:NYSE) taking the biggest pounding.

Shares of Citigroup and J.P. Morgan and other bank stocks closed sharply lower, in another bleak day on Wall Street. Citi plunged $3.95, or 10.97%, to $32.05. J.P. Morgan fell $1.59, or 6.09%, to $24.51. Both stocks set new 52-week lows. Meanwhile, the Philadelphia Bank Index sank 4.31%.

The swirl of bad news involves everything from the impact of the WorldCom (WCOME) bankruptcy filing to the specter of another round of congressional hearings that will focus on the role of the big commercial banks in the collapse of Enron. And the overall foul mood still hovering over Wall Street following last Friday's 390-point plunge in the Dow Jones Industrials isn't helping much.

Shares of Citigroup, however, were taking it on the chin more than others because of some ugly headlines in Monday's edition of The Wall Street Journal. Not only did the paper report that the National Association of Securities Dealer is investigating the bank's one-time star telecom analyst, Jack Grubman, but the Journal also reported that a congressional panel Tuesday will take a hard look at some $4.8 billion in questionable financing deals that Citigroup arranged for Enron.

In fact, the Senate's Permanent Subcommittee on Investigation has scheduled two days of hearings on the sophisticated financing deals arranged by Citigroup, J.P. Morgan and more than a half-dozen other banks. The panel is trying to determine whether the deals were really loans to Enron that were camouflaged as energy-trading transactions as part of a strategy to permit Enron to increase its reported cash flow and makes its debt load appear lower.

At the hearings, a number of top executives from J.P. Morgan and Salomon Smith Barney, Citi's investment banking arm, are scheduled to testify. The congressional panel also will hear testimony from a number of corporate finance analysts with Moody's Investors Service and Standard & Poor's -- the two major corporate-bond rating agencies.

The hearings are sparking new fear among investors that the big commercial lenders could be liable for millions of dollars in damages to Enron shareholders and bondholders. There's even the threat the Securities and Exchange Commission could pursue civil penalties against the banks on aiding and abetting charges, says Donald Langevoort, a securities professor at Georgetown University School of Law.

Add that all up, and it's horrible day for bank stocks.

<img src="http://chart.bigcharts.com/industry/bigc... JPM, BTO&comp=AAAAA:0&rand=2241" width=527 height=316>
C, JPM, BTO, Bank Index (BNK), S&P500 3 YR Chart

....Jen

-- posted by JenL_2

Citigroup, J.P. Morgan Marketed
Enron-Type Deals to Other Firms

Top 161. Jul 23, 2002 12:58 AM

» JenL_2 - Re: Bank Stocks Pummeled

More on the Bank Stocks Beating from 7/22 WSJ....

By JATHON SAPSFORD and PAUL BECKETT
Staff Reporters of THE WALL STREET JOURNAL

Citigroup Inc. and J.P. Morgan Chase & Co., already facing scrutiny for devising allegedly deceptive transactions for Enron Corp., marketed similarly structured deals to a slew of other companies, according to testimony that a senior congressional investigator will give at hearings that start Tuesday.

The names of the other companies weren't disclosed.

The hearings, part of a Senate investigation into the role banks played in Enron's troubled finances, are the latest in a series of investigations into the two banks regarding their ties to Enron, which filed for bankruptcy-court protection late last year. The investigations include separate probes conducted by the Securities and Exchange Commission and the office of Manhattan District Attorney Robert Morgenthau.

Now, a person familiar with the matter says, the Justice Department's Enron Task Force also is looking into the roles that financial institutions, including Citigroup, J.P. Morgan, Merrill Lynch & Co. and National Westminster Bank, now a unit of Royal Bank of Scotland PLC, may have played in Enron's demise.

Citigroup and J.P. Morgan declined to comment on the hearings or the investigations. Merrill and Royal Bank of Scotland couldn't be reached for a comment.

The deals under congressional scrutiny include arrangements known as Yosemite, devised by Citigroup, and Mahonia, devised by J.P. Morgan, both of which were designed to make Enron's public disclosures more appealing to investors, according to the testimony.

An official familiar with the investigation will testify at Tuesday's hearings before that panel that Yosemite, Mahonia and other deals allowed Enron to understate its debt by 40% while overstating cash flow by as much as 50%, according to a draft of his statement. Cash flow is a crucial measure of financial health for energy companies such as Enron.

"The evidence indicates that Enron would not have been able to engage in the extent of the accounting deception it did, involving billions of dollars, were it not for the active participation of major financial institutions," says a copy of the testimony.

Banks such as J.P. Morgan and Citigroup were "willing to go along with and even expand upon Enron's activities."

J.P. Morgan, in fact, had a "pitch book" to sell other companies on similar financing vehicles, according to a copy of the testimony. J.P. Morgan entered into similar transactions with seven other companies, while Citigroup shopped such deals around to as many as 14, with at least three entering into such relationships, the testimony says.

The hearings will focus on a commodity-trading vehicle known as a prepay, in which a financier gives money in exchange for future delivery of a commodity such as gas, gold or oil. Such arrangements are common, but in the hands of Citigroup and J.P. Morgan, they became the building blocks for extremely complex transactions that Enron used to disguise debt as trades and create the appearance the company was generating cash, people familiar with the matter said.

In Yosemite and Mahonia, the banks conducted a series of "round trip" trades in which a payment for a commodity such as gas or oil went from Enron to an offshore vehicle controlled by a bank, then to the bank, then back to Enron. So doing, the banks effectively lent money to Enron that was then lumped into the trading column rather than recorded as debt, those people said.

Subcribe to WSJ Online @ http://wwws.wsj.com

Purge it - purge it all!....Jen

-- posted by JenL_2

Top 162. Jul 23, 2002 8:37 AM

» CaptRon - Re: Re: Bank Stocks Pummeled

In response to message posted by JenL_2:

Hulluva find, Jen...Thanx...

-- posted by CaptRon

Top 163. Jul 23, 2002 8:40 AM

» Kirk - Re: Re: Bank Stocks Pummeled

In response to message posted by JenL_2:

This is sickening, but it makes me wonder if the banks were getting too big for their own good?

If the worst being talked about is true, then

it seems one part of Citigroup was helping Enron defraud bond holders...

then the other side of Citibank... was buying Enron bonds!

this doesn't make much sense.

-- posted by Kirk

Top 164. Jul 23, 2002 12:04 PM

» SteveT - Re: Re: Re: Bank Stocks Pummeled

In response to message posted by Kirk:

Agree it does not make much sense. But I have noticed the larger the company the more likely it is the left side of the brain doesn't know what the right side is doing. It is sickening.

-- posted by SteveT

Top 165. Aug 25, 2002 7:44 PM

» Jen_ - Bank of America : BAC

Bank of America (BAC) made the cover article of 8/26 Barron's....

<img src="/files/mysites/jen14/bofa.gif" width=200 height=200 align="left"> Clean Machine

Bank of America is poised to prosper as the economy turns

By JACQUELINE DOHERTY

Be careful what you wish for. For much of the '90s, America's big banks longed to be more like brokers, selling equities, advising on mergers and acquisitions -- and reaping fat commissions in the process.

Then the stock market turned south, corporate fraud at the likes of Enron and WorldCom began to unravel, and analysts and investment bankers found themselves on Capitol Hill being grilled by Congress about their role in the disasters.

Just as suddenly, good old-fashioned commercial banking started looking attractive again. And for Bank of America, the nation's third-largest bank, that's good news.

<img src="http://www.suite101.com/files/mysites/je..." width=161 height=295 align="left">BofA headquarters over Charlotte

The bank, based in Charlotte, N.C., generates 63% of its revenue from retail and middle-market banking -- that is, lending to companies with $10 million to $500 million in revenue. And though it isn't altogether free of exposure to the capital markets -- Bank of America purchased Montgomery Securities for $1.2 billion in 1997 -- it gets just 27% of its revenue from market-sensitive businesses. Compare that with its two larger rivals: Citigroup, where 45% of revenue is market-sensitive, according to research by Prudential Securities; and J.P. Morgan Chase, which derives 50% of revenue from businesses related to the markets.

And Citigroup and J.P. Morgan are embroiled in the Enron scandal, BofA looks clean as a whistle.

"Bank of America is a much more traditional, spread-driven bank than J.P. Morgan or Citigroup," says Brock Vandervliet, a bank analyst at Lehman Brothers. By that he means BofA earns the bulk of its profit on the difference between what it pays to borrow money and what it charges to lend it out. Vandervliet has an Overweight rating on the shares, with a 12-month price target of 82 -- about 20% higher than the current quote.

Granted, the bank did make some bum loans in the current credit cycle, advancing money to Enron and Adelphia, both now under Chapter 11 bankruptcy protection. And it still has loans that are under a cloud, such as those to Dynegy and Qwest Communications.

But with the economy seemingly turning the corner, many credit-watchers think loan delinquencies have peaked. If so, Bank of America's earnings will get a handsome boost as loan losses level off and slowly decline.

Last year BofA posted earnings of $6.8 billion, or $4.18 a share, on revenue of $52.6 billion. That was below the bank's record earnings of $4.52 a share in 2000, of course, but it's a far cry from the previous recession, in the early '90s, when many banks were in crisis and some teetered on the edge of insolvency.

Indeed, Bank of America now looks as solid as it has ever been. In the first quarter of this year, BofA had a Tier-one ratio, a measure of a bank's capital adequacy, of 8.09% -- more than double the 4% required by regulators. Return on equity, another important measure of a bank's efficiency, was 18.5% -- the best in years.

Analysts expect Bank of America's earnings to rise to $5.66 a share this year -- a number embraced by management -- and $6.30 in 2003. At a recent quote of 70, the company's stock trades at 12 times 2002 earnings estimates and 11 times 2003's expected results. In addition, the shares boast a rich 3.5% dividend yield.

But while Bank of America's stock has risen 50% from last year's low of 46.75, its price-to-earnings ratio on 2003 earnings even now only matches its projected 11% growth rate. Wells Fargo, considered the best-run of the big banks, trades at 14 times '03 estimates, and Bank One fetches a multiple of 13.

That's a thorn in the side of BofA Chief Executive Ken Lewis. "We think we have the earnings power, the diversity, the markets and the discipline and focus going forward to justify a premium P/E," he told Barron's in an interview.

Not everyone is convinced. James Moynihan III, a senior equity analyst at Evergreen Investments, which owns BofA shares, explains why some investors remain skittish: "The investment community doesn't want to pay a premium until Bank of America has proved it isn't going to make an acquisition."

That's a legitimate beef. Though Lewis has pledged to increase earnings organically -- through cost cuts and higher sales -- Wall Street is taking a show-me attitude, and with good reason.

During the 18-year reign of former CEO Hugh McColl Jr., the company made about 60 acquisitions. The present-day corporation includes vestiges of North Carolina National Bank, Boatman's Bancshares, Barnett Banks and the last and largest deal: the $60 billion merger of NationsBank and BankAmerica in 1998. And all that gobbling resulted in a huge case of indigestion.

For example, after NationsBank, the No. 3 player in Florida, bought Barnett Banks, the market leader, the combined entity had to sell 60 branches and close others, displacing customers and employees and driving market share in the state down from the mid-20s in 1998 to 21% today.

Lately, however, Lewis, a 33-year banking veteran who took the CEO spot last year, has started to get some recognition. "Lewis has been a huge positive surprise," says Ruchi Madan, a bank analyst at Salomon Smith Barney. "No one expected someone from inside the old regime to make such positive changes."

Lewis certainly has the credentials of an insider. The 55-year-old Mississippian joined North Carolina National Bank, known as NCNB, shortly after he graduated from Georgia State University 1969. Back then Lewis wasn't sure what he wanted to do, so he joined the bank to get exposure to all types of companies.

"I had a lot of work experience," says Lewis. "But I didn't have an Ivy League education and my parents weren't rich. NCNB was an upstart too, but it had huge aspirations."

That suited Lewis just fine. "I saw this very competitive environment and a lot of overachievers -- people who wanted to beat Wachovia, which at the time was the largest bank in the Southeast," he recalls. "It fit my personality and that's why I ended up there."

Ironically, as a credit analyst Lewis analyzed Bank of America. "Their growth of deposits was bigger than all of NCNB," says Lewis. "I do remember that pretty vividly."

Bank of America has four main business divisions: consumer and commercial banking, global commercial and investment banking, asset management and equity investments. In the first half of 2002, the consumer and commercial-banking unit generated 63% of the bank's revenue -- a level Lewis would be quite happy to sustain.

BofA's global commercial and investment banking operations, which targets large corporations, chipped in 27% of revenue. Lewis would like to reduce that contribution slightly, as he doesn't expect a big rebound in the capital markets and would like to see less volatility in the bank's results.

At the same time, he hopes to build up the bank's asset-management arm, which offers mutual funds and private-banking services. In the first half of this year, asset management contributed 7% to revenue. Lewis would like to double that number. "Companies that get the best multiples over time are those that give investors good growth rates with less volatility," he says.

So what about the recent rumblings that BofA has shown interest in purchasing either Merrill Lynch or Credit Suisse Group's Credit Suisse First Boston? Lewis declined to comment, but people close to the company say the rumors are untrue.

In any case, Bank of America's investment-banking unit remains a mid-tier operation, even after the Montgomery deal. The firm does best in underwriting investment-grade corporate debt, a category in which it ranks fourth, with an 8.7% market share in the first half of this year, according to Thomson Financial. The firm hasn't, however, broken into the major leagues for equity underwriting, where it ranked 11th with a mere 1.9% market share, or in mergers and acquisitions, where it has a 12th-place standing with 4.9% market share.

The bank's equity investment unit makes direct and indirect equity investments. The unit earned $460 million in 2000, at the peak of the bull market. In the first six months of this year alone, it has posted a loss of $85 million.

As with other banks, since 2000 losses in Bank of America's loan portfolio has increased as the economy soured. Net charge-offs as a percentage of average loans rose to 1.05% in this year's second quarter from a low of 0.55% in December 1999.

Likewise, nonperforming loans as a percentage of loans climbed to 1.45% at the end of the second quarter from 0.85% also at the end of 1999. But as the economy improves, losses should return to more normal levels. "There's a lot of leverage in this company to an improving economy," says Steven Wharton, an equity analyst at Loomis Sayles, which holds the stock.

Indeed, if charge-off rates return to typical levels, Wharton estimates the bank will save more than $1.1 billion before taxes, or 46 cents a share after taxes.

There's reason to believe we have seen the peak in credit deterioration, says David Hamilton, director of default research at Moody's Investors Service. The number of junk-bond-rated companies around the world that defaulted rose to a peak of 10.7% in January, and has gone sideways since then, coming in at 10.3% for the second quarter.

Hamilton forecasts an 8.8% default rate for the full year 2002 and the first half of 2003. Among all companies with rated bonds, the numbers are much better, but still elevated. In January the default rate peaked at 5%. It fell to 4.4% in June, but the norm is 1%.

Bank of America's Lewis also believes we're closing in on a peak in the credit cycle. "We would declare victory if it weren't for two or three things, [including loans in] telecom, energy, Argentina and Brazil." Indeed, the bank has about $2 billion in Brazilian exposure, $3.6 billion in telecom loans and $4.3 billion in loans to utilities among its $340 billion portfolio of loans and leases.

That said, Bank of America took a number of fortuitous steps that have reduced the company's risk. Last fall it exited the subprime lending business, which often has high default rates and has come under scrutiny for high-pressure selling tactics. BofA also opted to leave the auto-leasing business, where it's tough to gauge the residual value of automobiles once the lease ends.

At the same time, the bank has pared back the large commercial loans it retains. While BofA is the second largest syndicator of corporate bank loans -- behind J.P. Morgan and ahead of Citigroup -- it retains only about 10% of the loans it originates, selling the rest to other banks and investors.

"For about two years, we've been focused on how to reduce volatility and surprises on the credit side," says BofA Chief Financial Officer James Hance.

After the BankAmerica and NationsBank merger, the combined entity found itself with too much exposure to certain corporations. In other cases, the bank decided to exit relationships with companies whose business didn't generate sufficient returns. As a result, the commercial-loan portfolio has been reduced by $52.5 billion since the end of 2000, to $151.1 billion, or 44% of total loans and leases. The bank has an additional $325.8 billion of loan commitments, which includes letters of credit, credit-card commitments and legally binding commitments.

<img src="/files/mysites/jen14/bofa3.gif" width=369 height=301 align="right">BofA also has changed the way it manages its loan portfolio. It has separated the people who manage client relationships from the folks who manage the bank's loan portfolio, deciding which loans to hold and which to sell. As a result, portfolio decisions become less influenced by relationships and more analytic.

While the bank has decreased its exposure to corporate loans, it has increased its exposure to the consumer, primarily by boosting the number of home-mortgage loans it retains on its balance sheet. BofA holds $102.8 billion of mortgages, making them 30% of the entire loan portfolio. The number of mortgages has increased 31% since the end of 2001.

Throw in home equity lines, consumer finance and credit-card loans, and the consumer-loan portfolio adds up to $189 billion, or 56% of total loans.

This shift in loan mix makes sense given that the vast preponderance of loan losses have occurred in the commercial-loan portfolio. In the first quarter BofA charged off $510 million of commercial loans, compared with $378 million of consumer loans.

The risk, of course, is that consumers will feel the pinch if the U.S. economy sours. Lewis, for one, remains confident that the economy will manage to generate growth of 2.5% to 3% in the third and fourth quarter. What's more, the bank's economists like to think they have a leg up on the economic data that track consumer health, since BofA clears more checks than the Federal Reserve and handles 13.5 million credit card accounts.

"The consumer is still out there and obviously spending at a slower pace, but still spending," says Lewis. If we were on the brink of a double-dip recession, "our underlying consumer spending trends would be much, much weaker."

Bank of America touches millions of consumers every day, with operations in 21 states and the District of Columbia, 4,246 banking centers, 13,161 ATMs, 3.8 million online customers, and 27.4 million households with a Bank of America product or service.

Lewis believes the company can grow faster than the economy because it is among the largest players in states with the fastest-growing populations, including California, Florida and Texas. In the 21 states where the company has retail-bank offices, the population growth in the next 10 years will be more than 6%, double the 3% rate for the U.S. as a whole, the bank estimates.

BofA also hopes to grow by pitching additional services to existing customers -- the Holy Grail searched for by many banks but found by few. The company's strategy assumes satisfied customers will buy more products, so it is making large efforts to see that customers are satisfied.

For example, BofA has changed its pay incentives so bankers servicing consumer accounts are no longer judged just by the amount of products they can sell to customers. Bankers also will be measured by customer service, satisfaction and customer retention. By the end of the second quarter, 43.3% of customers were highly satisfied, up from 40.6% in 2001.

The improvement may be starting to show up in the bank's new account numbers. Bank of America added 32,491 checking accounts in 2000, 193,000 in 2001 and another 248,000 so far this year.

One of the major cross-selling opportunities lies within asset management. At the end of the second quarter, BofA had $297 billion of assets under management, generating fees tied to a percentage of the assets. It also has $90.5 billion of assets in brokerage accounts, on which it receives transaction fees. And it has $41 billion of assets in custody, which the bank holds but does not manage.

Lewis's goal is to turn commercial-banking customers into investors with Bank of America. "We have 79,000 private bank clients," says Lewis, "and 300,000 prospects who are [bank] customers now." He adds that the bank has four million customers with $100,000-plus at the bank who qualify for its Premier Group, a sort of Private Banking Lite. So despite the bear market, BofA has increased the number of financial advisors and private bankers on staff by 20% this year and hopes to repeat the hiring spree next year.

Ironically, the most profitable part of the private-banking business is lending -- and lending to the wealthy isn't without hazards. In the second quarter, the asset-management unit dramatically boosted its provision for credit losses to $144 million, compared to just $63 million in the first quarter of 2001. Reportedly, the bank made $44 million in personal loans to Samuel Waksal, the former chief executive of ImClone Systems who has been indicted for insider trading and bank fraud. BofA declined to give details about company relationships.

While Lewis has made clear his intention to increase the asset-management side of the business, he has at least one large problem. Most asset managers trade at 16 times 2003 earnings estimates, which would make an acquisition at today's levels dilutive to Bank of America's shareholders.

In any case, if an attractive deal comes along, asset management could jump to 15% of revenue. Even without an acquisition, Lewis says he expects the business to grow to 10% of revenue during the next two to three years.

Bank of America has reduced its share count by more than 43 million, or 3%, in the first half of this year. At the end of June, its buyback program had 50 million shares to go. Reducing the share count boosts earnings per share.

Earnings also have benefited from the favorable movement in interest rates. Net interest income -- that is, the difference between what the bank pays for its money and what it collects in interest -- rose by $671 million, to $10.5 billion, in the first half of this year. One of the bank's sources of cheap funding: investors who have moved their money out of the stock market and into savings accounts and money market accounts yielding less than 2%.

That isn't to say that there's no risk in the business. Net interest income can get squeezed if interest rates rise and the bank's funding costs rise faster than its loan portfolios. But that risk and others should be more than offset by the expected decline in delinquent corporate loans.

And if that happens, the stock market may finally give Bank of America the premium multiple its chief so desires.

Subscribe to WSJ & Barron's Online @ http://www.wsj.com

<img src="http://chart.bigcharts.com/industry/bigc... JPM, BAC&comp=AAAAA:0&rand=7282" width=527 height=316>
BAC, JPM, C, Bank Index (BNK), S&P500 3 YR Chart

....Jen

-- posted by Jen_

Top 166. Sep 18, 2002 7:12 AM

» Kirk - J.P. Morgan Chase

.
To:Gottfried who wrote (5417)
From: Return to Sender Tuesday, Sep 17, 2002 8:54 PM
View Replies (1) | Respond to of 5423

From Briefing.com: 7:35PM J.P. Morgan Chase (JPM) 19.80 -1.75: If the after hours session is any indication, it is going to be a tough day tomorrow for the financial sector and the broader market. For the most part, J.P. Morgan Chase is to blame as the investment bank issued a disconcerting earnings warning for its third quarter that was linked to a weak trading performance and high commercial credit costs concentrated in the telecom and cable sectors.
Specifically, JPM said commercial credit costs are expected to be approximately $1.4 bln in Q3 versus $302 mln in Q2, with the anticipated increase including significantly higher charge-offs and a provision in excess of charge-offs related to the commercial portfolio. Commercial nonperforming assets are expected to increase by roughly $1.0 bln. Trading revenues, which totalled $1.1 bln in Q2, were approximately $100 mln for the first two months of Q3. The sharp slowdown was attributed to less favorable results from trading positions and a seasonal slowdown in client flow.

Although JPM refrained from providing specific guidance, it did say it expects Q3 earnings to be well below second quarter 2002 operating earnings of $0.58 per common share. The current Multex consensus estimate is $0.55. As to be expected, JPM's unsettling revelations have weighed on a number of banking and brokerage shares in the after hours session as market participants fear the likelihood of further warnings from related companies.

As for JPM, it would be remiss not to mention that its Board declared a quarterly dividend of $0.34 per share and said it intends to continue the current dividend level, provided capital ratios remain strong and earnings prospects exceed the current dividend. Be that as it may, JPM is within striking distance of re-testing its 52-wk low and is now trading at a slight discount to its book value.

We suspect the latter realization, and the understanding that its current dividend yield is an eye-opening 6.87%, will invite some investment interest and some takeover talk as it did a few months ago. Nevertheless, JPM's story isn't a very inspiring one right now as it is clear it is still struggling with a number of problems, ranging from credibility to credit quality issues, that don't appear to have a quick, and easy, solution.-- Patrick J. O'Hare, Briefing.com

-- posted by Kirk