Stay Cautious On Financials

While several of the large financial stocks have indicated the potential for better results for 1Q09 than analysts have been predicting, there are several factors that we suspect investors should remain concerned about.

Several months ago, a moratorium was put in place to stop the foreclosure process and permit homeowners the time to find (if possible) alternative financing opportunities. Recently, this moratorium has begun to be lifted, and as the logical result, foreclosures have begun to rise.

We would suspect going forward that this would result in higher non-performing assets, net charge-off levels, and provisioning requirements in the next several quarters (unless the trend is reversed).

There has been much hoopla with respect to homes sales as of late. While the trend has improved a bit from the nonexistent levels experienced for most of the past year, we need to remember that the recent improvement has been the result of the “fire sale” conditions with respect to foreclosed homes owned by financial institutions.

However, an even more telling component of the home sales has been the fact that while the number of sales has increased, the price per home has continued to decrease on average, nationally.

Refinancings have been strong in 1Q09 as FICO score requirements have moderated so that 700-725 score can get funded versus the 750 or higher required just a quarter ago. However, considering that major financial institutions are charging in excess of 1.5 points to accept a mortgage that a mortgage broker is willing to do for zero points, we suspect this gouging may not be able to be sustained.

In addition, we suspect that a considerable level of the “loan growth” that will be exhibited over the near term may actually be attributed to purchased loans.

There has been much in the press with respect to financial institutions lowering credit card limits, raising interest rates and fees without prior announcement. This has increased the default rates on credit cards. Even though there are consortiums funded by select financial institutions and non-profit organizations set up to help the credit strapped consumer, these have not eliminated the pressures.

The results from “Stress Test” for the 19 largest financial institutions were put off until the end of the month. The rationale being the powers that be did not want there to be any confusion during the quarterly release period.

We would expect there to be a significant divergence between those that pass and those that do not pass. We suspect pressure on these financial institutions will continue as Wall Streeters bet on which ones will survive and which ones will not.

As pressure remains on the housing market and the economy, there have been
increased concerns voiced for commercial real estate. Unless economic conditions improve, we would expect the problems that have been experienced on the residential side will spread to the commercial side.

We indicated in our report of April 7, 2009, “Micro-Banking Has a Go in the U.S.,” financial institutions would not appear to be as committed to the small businessperson as we would like. In fact, bankers have been suggesting that some of their clients attempt to go through peer-to-peer outlets to fund $500-50,000 loans.

We do think that the angle of downward trajectory has moderated from the parabolic to a more moderate incline of lack. We do concede that there are “glimmers” of improvement. In fact, we welcome any real improvement considering the state of the economy. Our concerns remain for but are not limited to Citigroup (C), Bank of America (BAC), Wells Fargo (WFC), Regions (RF) and US Bancorp (USB).

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