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Mortgage fraud and bank stocks


ubuy2wron
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There has been a spate of articles recently describing the scope of the mortgage fraud foreclosure mess. Felix who has been one of my least favorite wall street scribes has written  a particularly shocking article.

http://seekingalpha.com/article/229999-the-enormous-mortgage-bond-scandal The banks have been generaly one of the weakest groups YTD. My question to the board is are we again entering value territory for some of the names or should this industry group just be thrown on the too difficult to ponder pile and move on. My own take on this is that the greatest risk likely lies with the cos that were the largest marketers of RMBS securities in the 2006 to 2008 period. It is interesting also to note that credit spreads for the banks have widened to levels not seen for a while.

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I think this is probably a great time to be looking at this industry. I tend to put any bank with a large investment (trading, advisory, brokerage) group in the too hard pile. Or maybe it's just that I think they offer little to shareholders; it's probably a lot better to be an employee of a Wall Street bank than an owner.

 

Doesn't Wells Fargo look cheap? Its pre-provision, pre-tax profit for 2010 is going to be close to $7.30 per share. Normally, it nets at least 50% of that figure. Currently it is netting only about 30%. As things normalize, the company is perfectly capable of earning $3.70 per share on present business volume. And what about the dividend? Basel III requirements look already met, the bank should begin to ramp up its payout toward the 50% of earnings figure it normally offers. At $23 and change, what's not to like?

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how do the foreclosure issues affect WFC ? are they exposed to any liability from investors if it is proved that they signed documents with reviewing them ?

 

i dont know how to evaluate this risk. would appreciate if someone has figured it out and can share it

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At $23 and change, what's not to like?

Non-performing loans are still increasing.

Dec 2009: 3.53%

Mar 2010: 4.03%

Jun 2010: 4.30%

 

Efficiency ratio is creeping higher.

ROA/ROE is nothing to write home about.

Free cash flow has been static when we're supposed to be in recovery mode.

There has been share dilution.

I do not like the growth by acquisition model for banks, you mix turds with anything and you just end up with turds.

High loan/deposit ratio.

 

But hey, Warren says Wells is a wonderful bank, so pile in.

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Guest broxburnboy

This issue seems to be getting bigger and more complex, potentially the next big credit crisis. Underemployed attorneys throughout the land are piling on this like flies on a dead dog's eye. The banks may be forced to roll back previous foreclosures and it may have an impact on the legal refusal of current mortgage holders to pay ongoing mortgage payments. It has huge negative implications for all holders of MBS.

See following explanation:

 

http://gonzalolira.blogspot.com/2010/10/second-leg-down-of-americas-death.html

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I don't know how the foreclosure issue plays out, but my bet is it is a lot less of an issue than the media is making it out to be. And I would go so far as to suggest that Wells Fargo is in better shape than Bank of America in that regard.

 

In terms of ROA/ROE, of course today they are nothing to write home about. When netting only 60% of your normal pre-provision, pre-tax profit on present business volume, you are going to see lower returns on investment. Our job is to see past that. Normalized earnings show very attractive ROA/ROE, especially for Wells Fargo (and US Bank) despite their shares outstanding having increased. The takeover of Wachovia will prove attractive. The growth by acquisition route taken by some banks during the meltdown was terrifically clever. This is not the pharma business where sellers know how precarious the value of their purchased R&D is. The reason Warren likes Wells Fargo and US Bank is because they are superior. Do a comparison of all large banks over the last 15 years, two banks will stand out as high ROA businesses with simple banking models and high net interest margin: Wells Fargo and US Bank. Unfortunately, US Bank is fairly valued, as far as I can tell. But Wells Fargo is well behind in its market valuation.

 

Why are so many of us still fighting the last war?

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I'm a WFC owner, both common stock and the TARP warrants, so I'll try and avoid any bias as defender of my idea here.  But I do think WFC is undervalued right now, despite undoubtedly having some short term issues to still work through while we work through this contained deleveraging process over the next few years.  They pay less for deposits by a good bit than most banks.  They execute cross selling far better than most banks.  They avoid troublesome activities far better than most banks.  They allocate capital better than most banks (see Wachovia, which doubled their footprint but only cost them about 20% stock dilution).  They wrote down a boatload of the problem loans from the Wachovia acquisition, and still have room left on those write downs.

 

The mortgage crisis will delay things a bit, but for now they have more confidence in their processes than the other banks have shown.  Time will tell here.  As a lawyer, my sense is that there are technical problems, and political momentum wants to "help the poor underwater unemployed person stay in their home" -- fair enough if you disregard the moral hazard.  But legally, there is no dispute that 99.9999999% of the people being foreclosed on are correctly losing their homes because they are not paying the amount they decided to borrow.  The law will not let these people off on technicalities forever - perhaps it delays things a bit and drives house prices lower for longer and delays recovery.  My guess is Wells will come out of this stronger and quicker than most, because of an ongoing culture of more conservative banking and good execution that they did not lose and still have.  When that happens, the earnings come with it and the stock should be valued as a financial stalwart at 12-15 P/E on a big earnings base, with greater market share due to decimated competition.    I'm very comfortable holding for the long term and buying mroe if it drops much more. 

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I don't know how the foreclosure issue plays out, but my bet is it is a lot less of an issue than the media is making it out to be. And I would go so far as to suggest that Wells Fargo is in better shape than Bank of America in that regard.

I agree with you on this - Bank of America scares me, quite frankly.

In terms of ROA/ROE, of course today they are nothing to write home about. When netting only 60% of your normal pre-provision, pre-tax profit on present business volume, you are going to see lower returns on investment. Our job is to see past that. Normalized earnings show very attractive ROA/ROE, especially for Wells Fargo (and US Bank) despite their shares outstanding having increased. The takeover of Wachovia will prove attractive. The growth by acquisition route taken by some banks during the meltdown was terrifically clever. This is not the pharma business where sellers know how precarious the value of their purchased R&D is. The reason Warren likes Wells Fargo and US Bank is because they are superior. Do a comparison of all large banks over the last 15 years, two banks will stand out as high ROA businesses with simple banking models and high net interest margin: Wells Fargo and US Bank. Unfortunately, US Bank is fairly valued, as far as I can tell. But Wells Fargo is well behind in its market valuation.
Just to preface my comments, these are concerns, I have no idea whether they're valid or not, but they worry me enough to keep me from investing. I think there are other banks out there that are a heck of a lot safer, with (possibly) marginally less potential performance.

 

With regard to Wells having a high interest rate margin, part of this stems from just how aggresively they are actually making loans, almost every penny they have on deposit is lent out. Now, this is all well and good during boom times, but when the business environment is poor and there are bad loans everywhere, then you've got to be absolutely sure that the loans you're making won't default. Given that Wells' NPA's are still rising - I have serious concerns here. While net interest rate margin is important, I think that the level of loans to deposits as to be looked at in tandem with this. In my opinion, sometimes it's best to be safe, rather than sorry. If you can't find suitable credit risks, then it's best to simply take the hit to the net interest rate margin and invest in lower yielding investment securities.

 

Secondly, you talk about Wells returning to normalized earnings. When will we see this happening, months, years, will they ever? I have no idea, but I think it's silly for anyone to take a stab at guessing. With that said though, instead of investing now for the turnaround, why not look at other banks out there that are doing better ROA and ROE than what Wells are doing?

Why are so many of us still fighting the last war?
Who said the war ended? ;D There's still a heck of a lot of bad loans out there and more deleveraging to come.
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I'm a WFC owner, both common stock and the TARP warrants, so I'll try and avoid any bias as defender of my idea here.  But I do think WFC is undervalued right now, despite undoubtedly having some short term issues to still work through while we work through this contained deleveraging process over the next few years.  They pay less for deposits by a good bit than most banks.  They execute cross selling far better than most banks.  They avoid troublesome activities far better than most banks.  They allocate capital better than most banks (see Wachovia, which doubled their footprint but only cost them about 20% stock dilution).  They wrote down a boatload of the problem loans from the Wachovia acquisition, and still have room left on those write downs.

 

The mortgage crisis will delay things a bit, but for now they have more confidence in their processes than the other banks have shown.  Time will tell here.  As a lawyer, my sense is that there are technical problems, and political momentum wants to "help the poor underwater unemployed person stay in their home" -- fair enough if you disregard the moral hazard.  But legally, there is no dispute that 99.9999999% of the people being foreclosed on are correctly losing their homes because they are not paying the amount they decided to borrow.  The law will not let these people off on technicalities forever - perhaps it delays things a bit and drives house prices lower for longer and delays recovery.  My guess is Wells will come out of this stronger and quicker than most, because of an ongoing culture of more conservative banking and good execution that they did not lose and still have.  When that happens, the earnings come with it and the stock should be valued as a financial stalwart at 12-15 P/E on a big earnings base, with greater market share due to decimated competition.    I'm very comfortable holding for the long term and buying mroe if it drops much more.  

 

As many of us on this board, I also own some WFC and bought some more on friday. I agree with you that this entry point is good and I hope this new wave of bankophobia keeps pushing the stock down to get some more. wfc has a wonderful moat due to its ability to retain customers by selling multiple products ( their goal is 8 financial products per customer I believe and they average 6 products per customer now); of course its key advantage is the spread between its cost of funds and the interest rate their charge which is  substantially wider than its competition ( one full percent over BAC for example). Anyway lets see what the next few weeks bring; maybe we'll be lucky and it will go down to 20  ;)

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I don't know how the foreclosure issue plays out, but my bet is it is a lot less of an issue than the media is making it out to be. And I would go so far as to suggest that Wells Fargo is in better shape than Bank of America in that regard.

I agree with you on this - Bank of America scares me, quite frankly.

In terms of ROA/ROE, of course today they are nothing to write home about. When netting only 60% of your normal pre-provision, pre-tax profit on present business volume, you are going to see lower returns on investment. Our job is to see past that. Normalized earnings show very attractive ROA/ROE, especially for Wells Fargo (and US Bank) despite their shares outstanding having increased. The takeover of Wachovia will prove attractive. The growth by acquisition route taken by some banks during the meltdown was terrifically clever. This is not the pharma business where sellers know how precarious the value of their purchased R&D is. The reason Warren likes Wells Fargo and US Bank is because they are superior. Do a comparison of all large banks over the last 15 years, two banks will stand out as high ROA businesses with simple banking models and high net interest margin: Wells Fargo and US Bank. Unfortunately, US Bank is fairly valued, as far as I can tell. But Wells Fargo is well behind in its market valuation.
Just to preface my comments, these are concerns, I have no idea whether they're valid or not, but they worry me enough to keep me from investing. I think there are other banks out there that are a heck of a lot safer, with (possibly) marginally less potential performance.

 

With regard to Wells having a high interest rate margin, part of this stems from just how aggresively they are actually making loans, almost every penny they have on deposit is lent out. Now, this is all well and good during boom times, but when the business environment is poor and there are bad loans everywhere, then you've got to be absolutely sure that the loans you're making won't default. Given that Wells' NPA's are still rising - I have serious concerns here. While net interest rate margin is important, I think that the level of loans to deposits as to be looked at in tandem with this. In my opinion, sometimes it's best to be safe, rather than sorry. If you can't find suitable credit risks, then it's best to simply take the hit to the net interest rate margin and invest in lower yielding investment securities.

 

Secondly, you talk about Wells returning to normalized earnings. When will we see this happening, months, years, will they ever? I have no idea, but I think it's silly for anyone to take a stab at guessing. With that said though, instead of investing now for the turnaround, why not look at other banks out there that are doing better ROA and ROE than what Wells are doing?

Why are so many of us still fighting the last war?
Who said the war ended? ;D There's still a heck of a lot of bad loans out there and more deleveraging to come.

 

WFC still has a large commercial mortgage portfolio and they will probably have a bit more trouble with some of Golden West's loans despite aggressive purchase write-downs. But when you can borrow at 0.5% you are equipped with a pretty remarkable deposit franchise, which helps to explain the loan to deposit ratio. Compare that to Citi which has an ~80% loan to deposit ratio but pays almost 2x on deposits and has 13% of deposits in non-interest accounts versus 22% for WFC.

 

Everything you read about a bank has to be viewed in relation to the deposit franchise. Regarding normalized earnings, sometimes the best purchases are made at high trailing P/Es. You either believe in a business model or you don't. Anything else is simply overweighting data points in an arbitrary time period.

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I think Foreclosuregate is only half of what caused the sell off in bank stocks last week.  On Thursday, the following report was released by some hedge fund manager:

 

http://www.businessinsider.com/bank-of-america-mortgage-report-2010-10#-1

 

That same day, the banks were down several percentage points and the monolines were up even more percentage points.  Basically, foreclosuregate in conjunction with more repurchase requests is causing people to believe that there is more dilution coming for the big banks -- especially for Bank of America, which now trades below tangible book value.  This focus on repurchase requests was probably caused by a letter sent by the Association of Financial Guarantors to BAC last month.  Good legal posturing on the part of the financial guarantors.

 

I still own C and the Series A TARP warrants for BAC though (thanks Omagh and Francis Chou).  It will be interesting to see how C, WFC, and BAC respond this week. 

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TXlaw - that report is junk. Here are my thought I put together tonight.

 

As Mr. Market has taken a short-seller's research and made significant adjustments to Bank of America in the recent week, I see opportunity in the shares. Opportunity exists because Branch Hill Capital has significantly over-shot its research. Research slides here.

 

Let's start with the basics:

Stock Price (10/15 Close) $    11.98

Book Value/Share (6/30 10-Q) $    23.24

Tangible BV/Share (6/30 10-Q) $    12.14

Tangible BV/Share (6/30 with CCB Value) $    12.86

EPS Mean Analyst Est. 2010 (Yahoo Finance) $        0.91

EPS (6/30 10-Q) Actual $      0.55

2009 EPS $    (0.29)

2008 EPS $      0.54

2007 EPS $      3.29

 

At the recent closing price, BAC is trading at a discount of 1.32% to tangible book value, 6.84% to tangible book value after the inclusion of the China Construction Bank interest, and 48.45% of book value. The stock trades at a PE of 13 for 2010 Mean Estimates and 8 times 2011 estimates.

 

This is the basic analysis. Trading at a discount to book and a low multiple to future earnings means a great deal doesn't it? However, the major issue weighing down the stock is the unforeseen risk with mortgage put backs required by GSEs, monoline insurers, and private label MBS.

 

Branch Hill Capital Projects the following losses based on its own research coupled with Compass Point Research:

 

  GSE Monolines Private Labels Total

Loss Projection 21.8 billion 7.2 billion $45 billion 74 Billion

Put Back Projection 36.6 billion 12 billion  Not provided

 

Branch Hill fortunately provides its assumptions and rough analysis to provide the figures. Let's start with the Monolines because this is the easiest to counter given the recent 10-Q from BAC. Branch Hill uses a arbitrary multiple of 3 to estimate the ultimate put back claim from the Monolines based on the recent 10-Q. Let's go to the 10-Q regarding the $4 billion mentioned:

 

    At June 30, 2010, the unpaid principal balance of loans related to unresolved repurchase requests previously received from monolines was approximately $4.0 billion, including $2.3 billion that have been reviewed where it is believed a valid defect has not been identified which would constitute an actionable breach of representations and warranties and $1.7 billion that is in the process of review. At June 30, 2010, the unpaid principal balance of loans for which the monolines had requested loan files for review but for which no repurchase request has been received was approximately $9.8 billion

 

So $2.3 billion of $4 billion were reviewed and it is believed there is not a defect which would indicate a breach of contract. This is an astounding 57.5% of the claims! Now there are another $9.8 billion underreview but no purchase request has been filed. It is not exactly clear the remaining $1.7 billion are valid claims, but needless to say taking a completely arbitrary multiple of 3 against the higher figure then assigning another arbitrary loss of 60% against this figure misleads the reader to believe higher losses can be expected.

 

Moving onto the Private Label figure the loss projection is again misleading. Here is a link to a Compass Research Note dated August 16, 2010 that is referenced in the slides by Branch Hill. The link is a pdf document. Compass Research uses the lawsuit of FHLB San Francisco v. Credit Suisse Securities (USA) LLC, et al.) and makes the following indication:

 

    In the worst case scenario, we assume that the rescission requests identified in the FHLB suits are indicative of the total potential

    pool of loans that could be rescinded industry-wide. While we cannot opine on whether or not the suit’s rescission percentage will

    ultimately be proven accurate, we believe that the data set forth in each particular suit is substantial enough to establish a worst case

    scenario.

 

This is likely a strench to extrapolate from the FHLB suits to the entire industry. It also does not provide any potential credit to the counter parties on their viewpoint on the documentation and exceptions. This underpinnes Branch Hill's calculation of losses.

 

Unfortunately as much as I have dug online as an individual investor, I have not located any definitive data on what the success rate is on private label rescissions/put backs and/or the current rescission rate across financial institutions. Compass provides the following table in its research:

 

Worst Case 2005 2006 2007

FHLB Recission Rate 43.2% 49.1% 54.5%

Alt A Success Rate (1) 50.0% 60.0% 75.0%

Alt A Severity Ratio (2) 50.0% 55.0% 60.0%

Subprime RMBS Success Rate 80.0% 80.0% 80.0%

Subprime RMBS Severity Ratio 50.0% 55.0% 65.0%

(1) Higher % equals larger losses as firms are more successful on the ultimate recession of loans

(2) Higher % equals larger losses as banks lose more from loans of the provided vintage

 

So because they are subprime, it is assumed they will be worse than Alt-A, and therefore more likely to be successfully put back to the banks. The figures also reflect high recission rates to be applied across a large span of assets. So Compass/Branch Hill assumes that GSE's will put successfully put back 20% with a loss of 60% and in private label mortgages it will be nearly double in terms of success? I doubt this logic will hold true. Why would the underwriting be that much worse by the same lenders to reflect the material discrepancy? Furthermore, only $33 million has been submitted for recission on Private Label MBS. More will come, but $33 million is nothing when you compare it to Branch Hill's $45 billion loss figure.

 

Moving to GSEs, reference Oppenheimer & Co.’s Chris Kotowski. As stated on Barrons.com:

 

   

 

    Moreover, Kotowski asserts, since there’s a delay of 12 to 20 months between the time a loan becomes delinquent and the time that Fannie or Freddie request a repurchase, it’s important that “problem flows,” meaning, new loans showing up as an issue, are actually declining. “The level of GSE put-back requests should have hit their peak/plateau somewhere between Q1 2010 and Q3.”

 

    Based on the total expected repurchases of Fannie and Freddie, $27 billion, and B of A’s share, B of A could be facing a total loss of $3.153 billion, Kotowski estimates.

 

 

Read his research for further information.

 

Regarding the loss assumptions, the S&P Case Shiller national average has lost 27.33% from the peak in Q2 2006 to Q2 2010. Even if you pad some numbers for costs of foreclosing, the properties did not lose 50% to 65% of their value plus any principal reduction received during the performing years of the loan. This is just silly. If they were land loans, I would understand the discount. I have looked and not located, but would love to see the hard data on what the actual loss has been.

 

As it is getting late, the summary is this:

 

    * BAC is undervalued - I see $17 as an easy 12 month target

    * Branch Hill capital is pushing paper to benefit its disclosed short on the stock. The numbers do not add up and the assumptions within the report do not stand up to the facts.

    * BAC with current reserves of $3.9 billion is adequately protected in the near-term and has the earning capability to cover additional exposure in the long-term.

 

Looking forward to the call and earnings on Tuesday. Long BAC.

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In response to Ballinvaroginvestors: When will normalized bank earnings re-appear?

 

In lieu of the quality of my forecasting abilities, I prefer the following line of thought:

 

1) For 2010, WFC is offering 10% earnings yield while earning 30% of pre-tax, pre-provision profit (ptppp);

2) In 2009, WFC earned 20% on ptppp which equates to 7% earnings yield at its present price;

3) Imagine in 2011 40% ptppp, which equates to 12%

4) Say in 2012, back to a more normal 50% or 16% earnings yield.

 

None of these earnings yield figures involve any growth in the volume of business for WFC, but nor do they suggest a lower volume.

 

The question really is, which is more probable, a return to 20%, remain stuck at 30%, or a gradual improvement to 40-50%. Assign your probabilities and your expected earnings yield pops out. Mine is for a gradual improvement and so my expected earnings yield is well higher than its present 10%. And I can be pretty patient with 10% in the meantime.

 

What did Monish Pabrai write in the Dandho Investor; heads I win, tails I don't lose much?

 

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In response to Ballinvaroginvestors: When will normalized bank earnings re-appear?

 

In lieu of the quality of my forecasting abilities, I prefer the following line of thought:

 

1) For 2010, WFC is offering 10% earnings yield while earning 30% of pre-tax, pre-provision profit (ptppp);

2) In 2009, WFC earned 20% on ptppp which equates to 7% earnings yield at its present price;

3) Imagine in 2011 40% ptppp, which equates to 12%

4) Say in 2012, back to a more normal 50% or 16% earnings yield.

 

None of these earnings yield figures involve any growth in the volume of business for WFC, but nor do they suggest a lower volume.

 

The question really is, which is more probable, a return to 20%, remain stuck at 30%, or a gradual improvement to 40-50%. Assign your probabilities and your expected earnings yield pops out. Mine is for a gradual improvement and so my expected earnings yield is well higher than its present 10%. And I can be pretty patient with 10% in the meantime.

 

What did Monish Pabrai write in the Dandho Investor; heads I win, tails I don't lose much?

 

 

If you buy them, they will come . . . back . . . eventually.  :)

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If I'm not mistaken, Citi has 50% of it's business in emerging markets.  This leaves room for solid organic growth versus the US centric banks.  

 

So Citi is trading below tangible book and perhaps has the best growth prospects.  Now, just to throw an example out there, if you pay 2x book and make 20% ROE, your return is actually only 10% (despite the high ROE) if there are no reinvestment prospects for retained earnings (no means of growing the business).  That 20% ROE is just going to wind up as a 10% dividend and you'll earn 10% economic return given that you've paid 2x book.

 

So Citi is going to be able to shelter it's earnings for a long time here going forward due to their tax losses that they can carry forward, and they're priced under tangible book with room to grow their overseas business (I believe only 25% of their business is based in the US).  These restrictions on the acquisitive dealings of US banks going forward if they approach 10% deposit share -- isn't that a concern, especially if you view organic growth as challenging?  So do Citi's other advantages here (growth and taxation) help to favor it more than just looking at these other metrics such as the cost of the deposits?

 

Personally, I own a lot of Citi (since late January) and own it for these reasons that I'm alluding to here.  Just interested in how others see it.

 

I like WFC's balanced earnings stream (50% from fees) -- helps cushion it from problems in the loan book.  However I wonder how they will grow and such.  I own some WFC too -- but I don't own BAC.  Clearly because C's stock performance has been so much better than WFC and BAC right now (past 1 month, 3 month, 6 month, and 10 month) I'm starting to get interested in shifting some money -- but I still don't see why Citi doesn't look the best at this point.  You've got the international growth, the tax free status for quite some time, and the best valuation based on price to tangible book.  So some of the internal metrics aren't quite as good... but once again you've got the after-tax metrics which will be the driver of tangible book, and the organic growth opportunities -- plus I believe they can make acquisitions in foreign markets without it raising the hackles of US regulators who want to limit deposit share to 10% (was that the number?).  I suppose nothing stops WFC or BAC from going more international, I just rather thought that the Citi name is already embedded overseas in many markets so growth seems more realistically attainable.

 

Thoughts on Citi's 75% international, 25% domestic footprint?  The pessimism I see on the US growth prospects that I've seen in other threads isn't in this one -- these banks have been discussed as if Citi's global footprint (and thereby growth) is of no consequence to the discussion.  

 

WFC I suppose does have room to grow by more cross-selling to it's Wachovia customers.  Another reason I own it, but I'd rather there also be a big tailwind from fast deposit growth as well.

 

 

 

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Citi is working through their credit issues and they have plenty of dry powder for foreign lending operations, but I'm not yet comfortable enough with Pandit and co. to entrust them with the execution risk of expanding in emerging markets. Now that they have shed the asset management and brokerage segment, are they going to aggressively improve their deposit franchise, or will they focus upon ROA targets, as they did in '05-'06, leading into the recession.

 

Ironically, much of Citi's recent revenue growth comes from North American operations, and more specifically from loans to other financial institutions. It just seems like they are in a transitional state with respect to foreign markets where they aren't expanding their lending activities, deposit base, or cross selling, despite sufficient capital.

 

Normally banks trade around 20%-30% of deposits, so a lot of fear is embedded in the price. I'm just worried about things like the fact that only North American deposits really grew during the scary parts of '08-'09, and that overseas Citi just doesn't seem to have a deep relationship with depositors.

 

Something like Citi is a pretty good candidate for a LEAPS play.

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For what it is worth:

 

Jim Rogers: Bank Stocks Not Attractive

 

http://www.gurufocus.com/news.php?id=109935

 

He is right sometimes, but for whatever it's worth he gets it very wrong too.

 

Here is a quote I pulled from The Davis Dynasty -- the book is describing a Barron's Roundtable from 1988 with Jim Rogers making his forecast:

 

"Most stock markets around the world," echoed TV commentator and motorcycle buff Jim Rogers, "are going to go up dramatically ... but no longer than six months, at which point we are going to have a real bear market.  I am talking about a bear market that is just going to wipe out most people in the financial community, most investors around the world.  And in fact there are many markets I would short but which I will not be short, because I think they will probably close them down."

 

 

I only bring it up because he gets a lot of mention as a guru, but nowhere in the media do I see them going back to see how full of BS some of his ideas and forecasts turned out to be.

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If I'm not mistaken, Citi has 50% of it's business in emerging markets.  This leaves room for solid organic growth versus the US centric banks.  

 

So Citi is trading below tangible book and perhaps has the best growth prospects.  Now, just to throw an example out there, if you pay 2x book and make 20% ROE, your return is actually only 10% (despite the high ROE) if there are no reinvestment prospects for retained earnings (no means of growing the business).  That 20% ROE is just going to wind up as a 10% dividend and you'll earn 10% economic return given that you've paid 2x book.

 

So Citi is going to be able to shelter it's earnings for a long time here going forward due to their tax losses that they can carry forward, and they're priced under tangible book with room to grow their overseas business (I believe only 25% of their business is based in the US).  These restrictions on the acquisitive dealings of US banks going forward if they approach 10% deposit share -- isn't that a concern, especially if you view organic growth as challenging?  So do Citi's other advantages here (growth and taxation) help to favor it more than just looking at these other metrics such as the cost of the deposits?

 

Personally, I own a lot of Citi (since late January) and own it for these reasons that I'm alluding to here.  Just interested in how others see it.

 

I like WFC's balanced earnings stream (50% from fees) -- helps cushion it from problems in the loan book.  However I wonder how they will grow and such.  I own some WFC too -- but I don't own BAC.  Clearly because C's stock performance has been so much better than WFC and BAC right now (past 1 month, 3 month, 6 month, and 10 month) I'm starting to get interested in shifting some money -- but I still don't see why Citi doesn't look the best at this point.  You've got the international growth, the tax free status for quite some time, and the best valuation based on price to tangible book.  So some of the internal metrics aren't quite as good... but once again you've got the after-tax metrics which will be the driver of tangible book, and the organic growth opportunities -- plus I believe they can make acquisitions in foreign markets without it raising the hackles of US regulators who want to limit deposit share to 10% (was that the number?).  I suppose nothing stops WFC or BAC from going more international, I just rather thought that the Citi name is already embedded overseas in many markets so growth seems more realistically attainable.

 

Thoughts on Citi's 75% international, 25% domestic footprint?  The pessimism I see on the US growth prospects that I've seen in other threads isn't in this one -- these banks have been discussed as if Citi's global footprint (and thereby growth) is of no consequence to the discussion.  

 

WFC I suppose does have room to grow by more cross-selling to it's Wachovia customers.  Another reason I own it, but I'd rather there also be a big tailwind from fast deposit growth as well.

 

 

This is actually why I like Citi.  Like you said, their international footprint is very attractive because of the growth prospects for their core businesses (Citi Corp, as opposed to Citi Holdings).  The fact that Citi is one of the big network banks that is vital to the global payment system is also what draws me to them.  Tax advantaged earnings are another benefit.  And being able to leverage their experience in multiple countries should also give their Securities and Banking Group an edge over the long run.

 

However, it's certainly riskier having operations abroad in emerging markets.  For example, imagine that Mexico totally collapses and becomes a failed state.  (I'm just throwing out a hypothetical -- I have no idea if things are really that bad in Mexico.)  Citi owns Banamex, which I believe is the second largest bank there next to BBVA Bancomer.  What happens to the business in such a situation?  There are always risks like that when you operate in as many unstable countries as Citi does, whereas if you own a BofA or Wells, you don't have to worry so much about those risks. 

 

The other thing is that it's not a given that the big domestic banks will be relegated to domestic markets for the long run.  Wells is too big to grow much more in the US, so it'll be a market share game for them for now, but there's nothing stopping them from doing partnerships with banks abroad or buying into foreign banks at distressed prices. 

 

But I do like the forward prospects of Citi better than either BofA or WFC, as long as they don't screw up big time like they have in the past (gotta watch that vigilantly).

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Has anyone looked into LPS?  Lender processing services appears to have taken a dive with the bank stocks with the recent foreclosure problems.  They are used by the majority of banks to process mortgage paperwork.  The company has insisted in two press releases they have done nothing wrong that would affect operations regarding the foreclosure scandal.   

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Has anyone looked into LPS?  Lender processing services appears to have taken a dive with the bank stocks with the recent foreclosure problems.  They are used by the majority of banks to process mortgage paperwork.  The company has insisted in two press releases they have done nothing wrong that would affect operations regarding the foreclosure scandal.     

 

Took a very quick look. Adjusting for high debt, it has around 10% FCF yield. I assumed all capex as maint capex, but you can dig more. Decent but not a mouthwatering prospect. You may find similar/better businesses with similar yield and if yield is same after adjusting the debt, I will prefer low or no debt. I spent only few minutes so weigh the opinion accordingly.

 

 

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