Sunday, July 13, 2008

Banking on Bailouts: How Many IndyMacs are Out There?

In what has been billed the third-largest bank failure on record, IndyMac Bank has been taken over by federal regulators. According to a weekend Wall St. Journal story, the bank's collapse will cost the Federal Deposit Insurance Corp. between $4 billion and $8 billion. That would exhaust over 10% of the entire deposit insurance fund of the FDIC.

That eye-opening statistic led me to wonder how many more IndyMac banks might be lurking in the wings. We had some alert to the gravity of IndyMac's situation simply by following its stock price, as shares moved from over $10 early in the year to under $2 by May. Perhaps year-to-date stock performance might alert us to other candidates for seizure--and further challenges for the FDIC.

With the help of data from the excellent Barchart site, I tracked the year-to-date performance of every publicly traded bank and savings and loan institution. I particularly focused on two groups of companies: those that have enjoyed a rising stock market performance year-to-date and those that have severely underperformed the market. I measured this latter group in two ways: those that fall into the lowest 20% of year-to-date performers across all NYSE, NASDAQ, and ASE issues and those that fall into the lowest 10%. Mr. Market is alerting us to the possibility of an IndyMac-like demise for this latter group, the majority of which are down more than 60% on the year.

Interestingly, I found 33 banks and savings and loan institutions that are up year-to-date in their stock market performance. They are outperforming the broad stock market, and they are trouncing their sector peers. Many are yielding 3% or more and have enjoyed solid earnings growth. I took it upon myself to look up a few annual reports for these financial institutions. All appear to have conservative lending practices, with no subprime residential loans and no major problem loans to overextended real estate developers.

Many of these high performing banks are located in decidedly unsexy areas where there was no real estate boom. Two of the banks, for example, are located in my former hometowns of Syracuse and Ithaca, NY. More than ten of the banks were located in the Northeast; only one was in the West.

The bank and savings and loan stocks falling into the bottom 20% of all market performers were far more numerous: there were 113 in all. Of these, 45 are severe laggards, falling into the bottom 10% of market performers. Interestingly, about half of these are located in the West and Southeast regions of the country: two of the hotter real estate markets during the boom. And the large regional banks? Seven fall into the underperforming category; two in the lowest group. None are up on the year.

The housing crisis does not appear to be over and yet the market is already warning us of at least 45 banks in straits potentially similar to IndyMac. Many more of the group of 113 may join that list as the housing situation unfolds, particularly among smaller banks. Meanwhile, I notice on the Bankrate site that many of the banks offering the juiciest CD rates are those on my list of stock market basket cases. It's understandable that they want/need to raise capital, but if the banks cannot fund those juicy returns, it will only be a larger call on FDIC funds. That is a demand that the FDIC is ill-prepared to meet, given its historically low reserve ratio, raising the unpleasant prospect of bailing out the regulators.