Monday, February 25, 2008

oppenheimer's call on banks

oppenheimer's out with a fairly major call saying they believe the next near term issue of focus for financial investors will be actual loan loss exposures, reserves, necessary provisioning, and subsequent earnings power. the firm is cutting their FY2008 and FY2009 estimates on the large cap banks by an average of 29% and 13%, respectively, based upon their updated accelerated loss curve assumptions as well as estimates for first quarter write-downs for leveraged loans.

the most drastic cut is aimed at c - opco is lowering their 2008 estimate to $0.75 from $2.70, although they believe their revised estimates could still prove optimistic. as c's balance sheet is highly constrained from both an inability to sell lower quality assets due to illiquid markets, as well as more assets coming back on its balance sheet due to illiquid markets, the firm continues to believe c will explore every option to sell assets. they continue to believe c will need to sell up to $100 billion in assets. they also continue to argue that under duress, c will likely be forced to sell what it can, and not what it should. c will likely only be able to sell its better earning assets for any type of positive return. this, on top of the above mentioned earnings headwinds, will create an intensely challenging earnings year for the company.

the firm believes c shares could fall to levels during the last credit cycle of 1990/1991, or to about 70% of book value of about 23/24. quite a hit from today's 25 a share. note, they estimate tangible book value at just over $10 per share.

the firm also believes loss rate acceleration is currently grossly underestimated by consensus estimates and reiterates an underperform rating on c.

yes, i'm long c - so take my analysis with a grain of salt - please! - but i continue to believe that this is the sort of breathless negativity one sees at the bottom. that's why i own c now - i see book value of 23/24 as the floor this time around. i believe the fears of being under-provisioned and the like are built into the share price right now. i believe that anyone remotely involved with the stock market knows that c is going to have an intensely challenging earnings year this year - any serious analysis of the company and its stock price dictates one looking out 18 months or more. and that's why i think this time is different from the '90/'91 period - back then the actual survival of these banks was in question and there was none of this mark-to-market stuff going on. i know things appear very bad right now, but ALOT of these "losses" are accounting losses - they can and in some cases probably WILL be reversed and taken back in as earnings in the future! one of my reasons for buying c down here was that i think even some of their writeoffs will be reversed back into earnings in the future when certain illiquid markets start to thaw. another factor to consider is the abk/mbi situation: this complicates things for the negativists. if positive deal news from abk and mbi becomes reality, possibly all of the major banks will go up - and maybe alot. after all, c has probably over 100 million shares short right now; not a huge short ratio, probably about 1.5, but that would still be a catalyst that would move the shares up, at least in the short run.

buy c here; it's my opinion you'll be glad you did a year or two out.


Jim said...

I agree with your posts. Financials seem cheap. By comparison, consider Warren Buffett's 1990 purchase (my info is from Hagstrom's "The Warren Buffett Way") of WFC at $57.88 per share:

Year 1989 1990 1991 1992
Earnings 600 711 21 283
Shares 50 50 50 50
EPS 12 14.2 0.4 5.6
PE @ $57.88 4.82 4.07 137 10.23

So Buffett bought WFC at an incredibly low 4 times peak (1990) earnings.

Prices of leading financials today are also cheap when compared to peak earnings, but not as cheap as WFC was in 1990:

Ticker BAC C COF
2006 EPS 4.60 4.32 6.69
2/22 Price 42.60 25.12 47.92
PE 9.26 5.82 7.16

I'm not sure how many shares are now outstanding with C, so it may be less cheap that what's shown above.

stocks and stuff said...

thanks jim. i agree that today financials are cheap, but not like in 1990. i just don't think financials today will get that cheap, as i don't think their basic survival is at stake this time. that's contrary to what one will see in all the media right now, but banks' tier 1 capital is quite good right now in my opinion. it wasn't back in '90....