Non-performing assets

After showing Ireland's biggest banks failed to report borrowings/encumbrances, I give EVERYONE means to play credit analyst. Calculate Ireland needing another bailout right here (hint: this app probably shames your favorite ratings agency).

It begins here: Introduction of cold, hard evidence of bank shenanigans (with complete documentation) that A) should be prosecuted & B) cause enough concern to make you worry about your bank's integrity. 

It's not just Cyprus, and no - it's not just Canada either. I'm preparing a list of specific banks that I have 1st hand knowledge that would prevent me from keeping my money in them. Get "Cyprus'd"!!!

When all is said and done, what happened in Cyprus over the past two weeks, is nothing but the culmination of re-marking the "assets" in the country's financial system (which as noted previously, were a preponderance of worthless Greek bonds and countless other non-performing loans), long priced at assorted "myth" levels, to a long overdue reality. As a result of delaying resolving the mismatch between non-performing assets and liabilities for years, the resolution was one which saw some €16 billion of the total asset base impaired, which in turn necessitated the impairment of billions of deposits: the primary liability funding the Cypriot financial system. Furthermore, as a result of the "Freudian Slip" by the Eurogroup's new head earlier this week, we know that Cyprus will be the template for all future bank resolutions, which seek to avoid a government vote and proceed to restructuring the banking sector a la carte, by liquidating bad banks and impairing liabilities to the point where the balance sheet is once again viable (however briefly). The bottom line is that at its core, it is all simply a bad debt problem, and the more the bad debt, the greater the ultimate liability impairments become, including deposits. Which means that the real question in Europe is: how much impairment capacity is there in the various European nations before deposits have to be haircut? Thanks to Credit Suisse we now know the answer.

China’s credit risk is rising, probably much more rapidly than the official non-performing loan (NPL) statistics indicate. SocGen is concerned as they think we are only seeing the beginning of the end of this NPL cycle. While they do not anticipate an outright banking crisis, as the government will certainly keep intervening at each turn on the way to avoid such an outcome, this is no reason to feel relieved. The reason being a major structural element in China's NPL cycle as many industries have massive excess capacity - after years of aggressive expansion that ran way ahead of demand growth - which eventually has to be eliminated. This process will take some time, during which faster depreciation in the form of deleveraging and consolidation will be unavoidable; and while expectations of an imminent hard landing may be overdone, the landing will nevertheless be multi-year and bumpy in their view.

Here come the facts!!! Warning, if you get your feelings hurt over hearing the truth, simply move on. You may have a couple of quarters lefft.

The only reason the real wage and salary growth has improved at all this year (a real growth rate of 1.1%) is because inflation has been declining since January as TrimTabs' Madeline Schnapp notes specifically "the price of gasoline has dropped sixty cents a gallon since April giving consumers about $60 billion in extra cash to save or spend". While good news, it is hardly sustainable and acts as a much weaker boost to the economy where balance sheets are still crammed with trillions of dollars of mal-investments left from the real estate bubble that have not been marked-to-market. These non-performing assets are like a ball-and-chain around the neck of the economy and the quicker they are liquidated the quicker the economy can get back on its feet. Schnapp sees lower job growth than consensus for June and while her pre-July-4th ebullience is clear, her less-than-sanguine view on the economy and the "purging of mal-investments - destroying wealth and contracting credit" means wage-and-salary growth will be anemic at best.

A land grab shrouded in a banking takeover, wrapped in a financial crisis "rescue." As always, insiders get first dibs.  (And, yes, there is an MF Global connection.)

We have recently witnessed a boom-and-bust cycle in Real Estate in Europe that overcame the banks of several nations including Ireland and Portugal. Now Spain is about to show up to be counted in my view. The issue all across Europe is that the sovereign does not have enough assets or capital to bailout their banks and many European banks are impaired; make no mistake. The first move was to lay off a lot of non-performing assets in securitizations at the ECB but the price always gets paid which will either be severe losses at the ECB requiring re-capitalization or the ECB handing back the collateral to the various banks which would probably bankrupt some of them especially in Spain, France and Italy. The ECB maneuver brought early success but now, as loans become due and as non-performance builds and losses must be recognized; the real truth forces itself upon balance sheets. There is a day when the auditors say, “Show me the money” and when it isn’t there the infamous “Oh My God” moment begins. Now Bubba, when you use the screwdriver and release the air from the tires it causes all of those little lights on the dashboard to begin to flash and then if you try to drive the car it goes “bump-bump” down the road. No Bubba, get off of your knees and get your mouth off of the thingy; you cannot blow air back into the tires that way.

While the Spanish government feverishly attempts to wrap up the country’s euphemistic financial system reform, the ever-expanding black holes, multiple balance-sheets restructuring with infinite amounts of public funds and reiterated calls for the need to further consolidate financial institutions seem to be setting up the stage for a self-fulfilling prophecy of Mayan proportions.  Hopefully, this time around, we can learn from the not-so-ancient Mesoamericans’ hard-learnt lessons of the dangers implied in the state breaking the rules of free market capitalism when bailing out institutions and interest groups at the taxpayers’ expense. If we don’t, at least the endgame should not take anyone by surprise.

Overall, EverBank is showing good current performance, but some of the asset quality factors and trends that I see are of concern for the future.

The just reported Bank of America top and bottom line numbers were better than expected, coming in at $24.89 billion compared to estimates of $24.5 billion, and EPS of $0.18 vs $0.15. The actual Net Income number number was $2.0 billion and $2.7 billion pre tax. So far so good. But a quick skim through the presentation (attached below), indicates that the $0.18 number may be grossly inflated. Because when one excludes the various selected one time items highlighted in the quarter, which are as follows: Gain on sale of CCB shares-$2.9; Gains on exchanges of trust preferred securities - $1.2; Gains on sales of debt securities - $1.2; Representations and warranties provision - ($0.3); DVA on trading liabilities- ($0.5); Goodwill impairment - ($0.6); Fair value adjustment on structured liabilities - ($0.8); Mortgage-related litigation expense ($1.5), all of which it appears are part of the pretax number, the final EPS comes in at a much less impressive $1.3 billion pre tax, which at the company's indicated tax rate, would have been $1.0 billion after tax, or $0.10 EPS, a notable miss. Which likely means that the Revenue "beat" on an apples to apples basis would also have to be pro forma'ing a bunch of items, and likely would be a miss. But for that we will need to go through the several hundred page 10-Q, something which management is hoping the machines which will send its stock much higher in the pre-market session, will never do. Another notable item is that for the first time in a long time, the company's average deposit balances declined by 1.2% in Q4 from Q3, from $422.3 billion to $417.1 billion (as the rate on deposits fell from 0.25% to 0.23%). Not a good trend, but certainly to be expected following the snafu with the company's electronic banking website last quarter. Also troubling is that in Q4, the company's Home Equity Non-Performing Assets increase for the first time in years, from $2.4 billion to $2.5 billion: it seems the improvement in housing has plateaued. Finally, and most troubling, is that BAC reported that "Estimated range of possible loss related to non-GSE representations and warranties exposure could be up to $5B over existing accruals at December 31, 2011." The reason: a surge in New Claims in Q4 "primarily related to repurchase requests received from trustees on private-label securitization transactions not included in the BNY Mellon settlement." Which means another $5 billion out of Net Income due to underreserving. Because how much did BAC provision for Reps and Warranties in Q4? Why a 'whopping' $263 million. And how much is the potential full notional value of underreserved contingent liabilities? Why $755 billion only.

All you need to read.

Geithner said US banks aren't at risk, shares spiked. He's considered a (super)hero by some. I say look to track record, TRUTH, facts & actual accomplishments for our new superheroes! Here are some Goldman Sachs FACTS Geithner forgot to mention!!! Must have left them home with his cape...

3-month USD Libor has not dropped day-to-day since July 25th - a 46 day streak - and while the  individual rates indicated by LI(E)BOR are 'around' 37-43bps currently, someone (or more than one) is willing to overpay (by over 200%) as the Fed's USD swap line usage (or non-EURO tender operations) remains $500mm at a rate of 109bps (vs 107bps the previous week). Perhaps it is time for a certain French bank CEO (who enjoys all the media exposure when telling naive gullible mom and pops just how stable his balance sheet is) to sell some more non-performing assets? Or CSFB to explain how their rate has been flat for 11 days in a row now?