Build a Banking Circle of Competence

[Opihiman]

Banking is one sector where I really have no point of reference, but am interested in building a circle of competence. I'm talking about commercial and retail lenders - not brokers.

 

Outside of buying a small bank, how might one best go about learning all they can about the sector? A few books for recommended reading? The annual reports of a few select banks to read?

[Morgan]

OddBallStocks writes a good bit about banks on his blog (http://www.oddballstocks.com) and has a website with all the data you could ever want on banks (http://www.completebankdata.com/). From there you should albe able to get a decently solid grasp on banking. 

 

He also hs some banking primer posts. Read those posts and the comments:

1. http://www.oddballstocks.com/2013/02/a-banking-primer.html

2. http://www.oddballstocks.com/2013/08/a-banking-primer-part-2.html

3. http://www.oddballstocks.com/2013/09/banking-primer-part-3-first-northern.html

4. Case study - http://www.oddballstocks.com/2013/12/versailles-financial-almost-too-good-to.html

 

From there get, and maybe sooner, get annual reports for small banks and read, read, read!

[LC]

PlanMaestro's website has an excellent series on bank analysis.

 

Also, the BAC A-Warrants thread.

[thepupil]

See attached

analyzing_and_investing_in_community_bank_stocks1.pdf

[fareastwarriors]

Banking 101 by DB.

Banking_101_Handbook_DB_May2011.pdf

[jay21]

PlanMaestro's website has an excellent series on bank analysis.

 

Also, the BAC A-Warrants thread.

 

Highly recommend Plan's website.  I still revisit some articles every so often.

[TwoCitiesCapital]

Plan's website is great and has been the place I recently started in building a circle of competence around financial institutions.

 

I have a quick question - Santander has mentioned recently that a large % of their NPLs are still "performing" in that they're still receiving cash for them. I also saw Berkowitz mention in his analysis of Wells Fargo that their NPLs were still yielding 6.1% (when the prime rate was at 6%).

 

My understanding is that an NPL is a loan that hasn't received interest and/or principal in the past 90+ days. Once payments resume, the loan is considered performing again even if the balance isn't up to date (debtor is still "behind"). So my questions is, if NPLs are reclassified when they begin paying again, how can an NPL have a cash yield? Is it as simple as borrowers paying interest only which would still classify the it as an NPL while yielding cash? Is there more to this?

[SharperDingaan]

Zach:

 

Assume a 100K interest only loan @ 6%, with the loan to be repaid when the underlying asset (house) is repaid. The borrower gets into trouble & stops paying interest; under normal conditions the loan is declared NPL at 120 days, the lender repossess, sells the house for more than the o/s balance - & walks away whole.

 

But if enough people could not pay, there would be massive social unrest, the repossessions & sales would glut the soft market, & the bank would incur large & permanent loan losses. The solution is to refinance under more generous terms, either under some kind of legislated 3-5 year moratorium (Greece, Spain), or a specific government program (US).

 

Over the moratorium period the bank might change the interest rate to 2%/yr, & guarantee the interest payment; so that on exit the loan is now slightly over 106K+ [100K*(1.02)^3], & the borrower paid nothing during the moratorium period. The 106K exit loan is then refinanced on a P&I structure over 2-3 years to reduce the 106K balance back to 100K; thereafter it reverts back to its interest only structure.  Moratorium loans are typically financed through direct central bank borrowing, at enough of a spread to generate the additional regulatory capital needed to support the loan. As these are non standard loans, they are routinely fair valued but designated Held To Maturity HTM; so that MTM variations do not hit the P&L.

 

Cash yield is the cash interest being received (either by new loans, or reduced borrower cash payments)/MV of the loan.

Because cash is being received they are 'performing' loans.

 

SD

 

 

 

 

 

 

 

 

 

[Rabbitisrich]

 

I have a quick question - Santander has mentioned recently that a large % of their NPLs are still "performing" in that they're still receiving cash for them. I also saw Berkowitz mention in his analysis of Wells Fargo that their NPLs were still yielding 6.1% (when the prime rate was at 6%).

 

My understanding is that an NPL is a loan that hasn't received interest and/or principal in the past 90+ days. Once payments resume, the loan is considered performing again even if the balance isn't up to date (debtor is still "behind"). So my questions is, if NPLs are reclassified when they begin paying again, how can an NPL have a cash yield? Is it as simple as borrowers paying interest only which would still classify the it as an NPL while yielding cash? Is there more to this?

 

I can't speak to Banco Santander, but it might be analogous to U.S. banks reclassifying loans as performing/accrual to non-performing/nonaccrual, and then back. The gist of a non-performing asset is that your economic interest is permanently, "other than temporarily", impaired. 90+ and 120+ days are tests of impairment. But you could also look at undercollateralization, falling behind on payments, and being a secondary interest to a loan in default. In all of those situations, the borrower may be paying in excess of their principal, to the full amount of the scheduled interest owed, but you still have cause to lower your expected return on the loan. Yet, you wouldn't recognize interest on a non-performing loan until you actually receive the cash, vs. a 60+ late mortgage where you would record accrued interest, or a 250% overcollateralized 1st home mortgage.

 

For example, if you go back to 2010, there were lazy claims that big banks were throwing huge amounts of impaired loans into the troubled debt restructuring (TDR) in order to avoid charge-offs. But a TDR can be performing or non-performing! Many of these borrowers turned out to be good credits under temporary stress, and they kept paying, or worked out a reasonable loan adjustment, and maintaing, or returned to, accrual status. If you rework the lending conditions so that your new loan is of lesser economic value than your original loan, you charge off the uncollectible amounts to get to your collectible value, and the new loan may be performing. Also,

[TwoCitiesCapital]

Thanks for your responses. That mostly makes some sense to me.

 

I'm having trouble investigating loan loss reserves. I know that reserves are a contra asset that reduces loan assets on the balance sheet and they are increased/decreased each year by loan loss provisions and charge offs. Are banks required to report the total amount of loan loss reserves they currently hold? Where is this typically reported?

 

I can go back several years and see all of the provisions and charge offs and get an idea of the net change; however, that does nothing in establishing a total value of reserves to give me an idea of how much is set aside against bad loans. I can't seem to find this item in the annual reports of the banks I'm looking into.

[Enrico Pallazzo]

Allowances for loan and lease losses are reported in some detail in FR Y-9C reports.  The FR Y-9C reports for the top 50 US bank holding companies are:

 

https://www.ffiec.gov/nicpubweb/nicweb/top50form.aspx

 

All FR Y-9Cs are public.  You can search for smaller banks via the "institution search" tab.

[Palantir]

Those are some great articles by Oddballstocks.

[yadayada]

any thoughts on hellenic bank?

 

Pretty big discount to equity.

 

https://www.hellenicbank.com/images/media/assetfile/accounts%20notes%20092013%20english.pdf

 

https://www.hellenicbank.com/images/media/assetfile/annual%20report%202012.pdf

 

Would love to hear a quick opinion from some of the banking pros here :) Both to either invest or deposit money in this bank.

 

reason I am asking is mainly because they offer 2.5% if you lock the money for 6 months. It looks like they have high cash balance.

 

But their non performing loan balance basicly doubled in 2013 to 1.9 billion . It is a cyprus bank.