On Q2 Bank Earnings and IRA Ratings, Very Briefly

I thought the readers of TBP might be interested in where we are with the development of our bank ratings and also which banks we actively follow as part of the IRA Advisory Service. Of note, we’ve also built a new theme park for our consumer users: www.irabankratings.com.

Over the past four years,  we have established several objective and subjective measures for looking at bank safety and soundness benchmarking, including:

** The Banking Stress Index:  An objective stress test survey of the entire US banking universe looking at discrete measures including Return on Equity, Capital, Defaults, Lending and Efficiency.  We present as an index, with the benchmark year set to 1995 (a mediocre year) with a value of 1 and limit the maximum score to 100 or two orders of magnitude above the benchmark year.  Banks being resolved by the FDIC typically have stress score near 10, while the industry average stress is around 2.3.

** CAMELS Ratings: This is a more subjective measure that uses the regulatory, 1-5 scale for measuring Capital, Asset Quality, Management, Earnings, Liquidity and Sensitivity to Market Risk.  The scale is 1-5, with 1 being excellent and 5 being headed for resolution.

** Economic Capital: This is a classical calculation of maximum probable loss for three buckets: lending, investing and trading.  The assets are scored  in a stressed scenario based on risk, including OBS exposures.  We then sum the three MPLs to come up with Economic Capital.  If the bank has more EC than regulatory capital, the business model is considered more risky, etc.  JPM is 4:1.  BAC and WFC are 2:1.

** Outlook: This is a purely subjective view of the immediate operating prospects for a given subject in view of current financials, and the market and economic environment, which we publish in the IRA Advisory Service.

Right now, the key tension for earnings visibility in the banking sector is between reserve build and charge-offs.  Capital markets and non-interest income are very nice to have, but credit loss is the looming issue for the remainder of 2009.   As a result, we downgraded US Bancorp (NYSE:USB) to “neutral” outlook from “positive” and kept Cullen/Frost Bankers (NYSE:CFR) unchanged at “positive” outlook.   Earlier in the week, we added Webster Financial (NYSE:WBS) to the list with a “negative” outlook.

The Q1 profile for WBS from The IRA Bank Monitor way been viewed by clicking this link:  wbs_q109

Below is our ratings matrix as of July 28, 2009.

Ticker Stress Rating* Date Outlook** As of Date
GS “A” Q109 Positive Q2 09
STT “A+” Q109 Positive 2008
NTRS “A+” Q109 Positive 2008
CFR “A+” Q109 Positive 2008
BOH “A+” Q109 Positive 2008
USB “A” Q109 Neutral Q2 09
JPM “B” Q109 Neutral 2008
BK “A” Q109 Neutral 2008
BBT “A” Q109 Neutral Q1 09
RF “B” Q109 Neutral Q1 09
MI “C” Q109 Neutral Q2 09
BAC “B” Q109 Negative 2008
WFC “A” Q109 Negative 2008
C “C” Q109 Negative 2008
PNC “A” Q109 Negative Q1 09
HSBC “D” Q109 Negative 2008
STI “F” Q109 Negative 2008
RBC “F” Q109 Negative 2008
TD “C” Q109 Negative 2008
FITB “B” Q109 Negative 2008
KEY “F” Q109 Negative 2008
COF “C” Q109 Negative 2008
WBS “F” Q109 Negative Q2 09
* Objective Stress Test rating for US bank units only
** Subjective view of forward operating results.

Source: The IRA Bank Monitor

Bottom line on Q2 numbers is that we heard nobody in the bank CSUITE even begin to suggest a peak in loss rates in 2009 during earnings calls.  Indeed, most of the calls suggest that 2010 may be the peak and that the duration of losses could be extended.  In both respects, this is very different from any post-WWII recession and is the main driver for our continued cautious outlook on everything save the most righteous bank names — like CFR, BOH, WABC.


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