EVEN GOOD BANKS SEE SHARES HIT
Even well-run banks with little subprime or exotic option-ARM mortgages are getting hurt.
Sovereign Bank, whose well-capitalized balance sheet stands out among its peers, saw its shares beaten down 24 percent last week before recovering a bit.
Its sin was unloading their entire $750 million AA+-rated CDO book – which was comprised of investment-grade corporate bonds and had experienced great volatility and worried some on Wall Street – at a steep discount.
One Wall Street analyst estimated the CDOs sold for 20 cents on the dollar – losing $600 million of their initial investment.
Two weeks earlier, at the Lehman conference, CFO Kirk Walters firmly told investors, when questioned about risk in their $750 million CDO book, “they are tied up investment-grade corporate bonds valued at 45 cents on the dollar.”
Helping to crater Sovereign shares was the fact that the CDO sale came on the heels of the bank’s forced writedown of $623 million in Fannie Mae and Freddie Mac preferred shares.
James Abbott, an analyst at Friedman, Billings, Ramsey, wrote in a research report after the CDO sale that, “we think the billion-dollar, one-two punch of [Fannie] and [Freddie] securities impairments and CDO impairments in the same quarter may have placed Sovereign Bancorp on the brink of ‘well capitalized,’ at about 10.05 percent risk-based capital” – risk-based capital of 10.0 percent is the threshold.
Abbott believes it leaves Sovereign with only $35 million of excess regulatory capital.
But other market experts who cover the bank think they actually have a built in safety net.
Analyst Robert Hughes, of Keefe, Bruyette & Woods, who has a buy rating on Sovereign, his only “buy” rating of all the banks he follows, says Sovereign has $1.2 billion in cash at the holding company, which can be downstreamed to the bank to bolster capital ratios.
Sovereign might also get good news from Washington.
“The latest draft of the [$700 billion bailout plan] includes language suggesting that any bank or thrift that owns GSE preferred stock can treat the loss as an ordinary loss rather than a capital loss (i.e., it does not have to be offset against a gain),” Hughes said.