Saturday, 31 May 2008 01:00

Doo-Doo Bank 32 drill down: Part 2 - Popular

We will be comparing and contrasting lot of banks on the Doo-Doo 32 list, with an occasional thorough drill down and forensic valuation. This is a brief overview of Popular compared with Wells Fargo, with a few more banks to come.I will use this matrix to compare many of the banks in the list side by side.

The Asset Securitization Crisis Analysis road-map to date:

  1. Intro: The great housing bull run – creation of asset bubble, Declining lending standards, lax underwriting activities increased the bubble – A comparison with the same during the S&L crisis
  2. Securitization – dissimilarity between the S&L and the Subprime Mortgage crises, The bursting of housing bubble – declining home prices and rising foreclosure
  3. Counterparty risk analyses – counter-party failure will open up another Pandora’s box
  4. The consumer finance sector risk is woefully unrecognized, and the US Federal reserve to the rescue
  5. Municipal bond market and the securitization crisis – part I
  6. An overview of my personal Regional Bank short prospects Part I: PNC Bank - risky loans skating on razor thin capital, PNC addendum Posts One and Two
  7. Reggie Middleton says don't believe Paulson: S&L crisis 2.0, bank failure redux
  8. More on the banking backdrop, we've never had so many loans!
  9. As I see it, these 32 banks and thrfts are in deep doo-doo!
  10. A little more on HELOCs, 2nd lien loans and rose colored glasses
  11. Will Countywide cause the next shoe to drop?
  12. Capital, Leverage and Loss in the Banking System
  13. Doo-Doo bank drill down, part 1 - Wells Fargo

End of the Secular Bull Market?

We have had a strong bull run in nearly all risky asset classes over the last 10 to 15 years: stocks, real estate, commodities, emerging markets, you name it. Is the jig over. Study the charts below.


Valuations still high?

For those who think stocks are cheap due to the rapid reduction of prices of late, think in terms of valuations and historical trends and you may find that they are not as cheap as you thought - particularly if you believe in earnings cycles. We are just coming off of an earnings cycle peak.


The Biggest Risky Asset Run of All Time???

Housing, stocks and commodities are setting all time or near all time records. We have begun a correction in all three of the risky asset classes. Residential real estate has the farthest to fall, by far. As a matter of fact, adjusting for inflation, in residential real estate no other bull run (including the gold rush) has produced even half of the real price spikes that the last bubble has. Do you know what happened after the last, much lesser, real estate bubbles? What do you think will happen this time around? All of that talk of prices stabilizing in '09 or '10 lacks historical precedent!


Loans & Risk

Now, let's get back to those Doo-Doo banks, shall we. This is the Doo-Doo Bank grid that I will put nearly all of the banks in.

Wells Fargo Popular Inc
WFC US Equity BPOP US Equity
Home Equity Loans 83,860
Construction and devlopment loans 17,228 1,996 These high risk loans are present, though
Commercial Real Estate Loans 29,310 5,939 The same for these
Total Loans ($ mn) 393,632 33,321
% of Total Loans
Home Equity Loans 21%
Construction and devlopment loans 4% 6% Small capital base, less cushion for loss
Commercial Real Estate Loans 7% 18% This concentration could be problem
% of Shareholders' equity (based on 3Q Loans)
Home Equity Loans 178% 49% This is potentially a big problem
Construction and devlopment loans 36% 56% This is potentially a big problem
Commercial Real Estate Loans 62% 166% This is potential problem, high concentration
Total Loans 826% 930% Popular has nearly 10x its equity in loans, 270% of which is extremely risky in one of the worst down-markets this country has ever seen.
Core Capital ratio / Tier 1 risk-based capital 7.6 10.1 This ration is not that bad
Total risk-based capital ratio 10.7 11.4 Neither is this, could be worse
Leverage ratio 6.8 7.3
NPA -to- Total Loan 1.01% 3.04% This is very bad!
NPA / Shareholder's equity 8.1% 23.8% This is even worse! Nearly a quarter of shareholder equity is dead weight and worth zilch! Adjust for tangible equity and this number goes higher.
Net Chare-off's / Loans 0.93% 1.51% This is pretty high for all loans!
Net Charge offs / Shareholder's Equity 7.43% 11.81% Shareholders should revolt!
Provision for loans to Total Loans 1.41% 1.87%
Reerve for loans to Total Loans 1.39% 1.96%
Cushion for losses 0.38% -1.08% Take note, there is a negative cushion for losses here. This bank will probably announce the need for capital very soon!

Performance & Market Info

Wells Fargo Popular Inc
WFC US Equity BPOP US Equity
Return on assets 1.5% -0.2% Popular is burning through its assets. Keep in mind (referenced above) this banks is leveraged 7.3x, and is losing .2% of its assets. That is about 1.6% to 2% burn on shareholder equity just by being in existence - Considerably higher if adjusted for bullsh1t and tangible equity is taken into consideration. No wonder they have a negative cushion for losses!
Return on equity 16.9% -1.8% See above.
NIM 4.69% 3.64% Margins are thin here and the Fed is probably not going to drop rates much more.
Efficency ratio 59% 67%
Interest income-to-intest bearing liablities 8.5% 8.8%
Interest expense-to-Total deposits 4.3% 6.4%
3 month price performance -7% -3%
12 month price performance -22% -30%

Amazingly enough, the share price hasn't dropped in sympathy with their financial situation.

LAST_PRICE 28.5 11.9
Shares Outstanding 3,296 280
Currnet Market Cap 94,059 3,341
Geographic exposure
- California 36.1%
- Florida 3.8%
Origination Channel
- % of Third Party 14%
- % of Branch 86%
Weighted avg LTV NA

Other Stats & Facts

Wells Fargo Popular Inc
WFC US Equity BPOP US Equity
% of Home Equity Loans with
LTV > 90% 29%
80% < LTV < 90% NA
Avg FICO score (Home Equity) 725
Deliquency Home Equity
- 4Q2007 1.51%
- 4Q2006 0.88%
Home Equity exposure (4Q data)
- % of Equity 178% 49%
- % of Gross Loans 21% 6%
- % of Assets 15% 4%
Net Charge offs
- 4Q2007 1.34%
- 4Q2006 0.25%
(Based on FY 2007 annual data)
Price-to-book value 1.99 0.98
Price-to-adjusted book value 2.82 1.24
P /E 11.8 N/A
P / E Continuing ops 11.8 45.7
Charges offs 3,539 423.08
HIGH_52WEEK 38 18
LOW_52WEEK 24 8
Share Price 1M 30.4 12.3
Share Price 3M 30.7 12.2
Share Price 1 Yr 36.4 17.0
Charge offs/NPAs as of 12/31/2007 91% 50%

I will be posting about 30 other banks over the next few days, with an intense drill down on about 3 of them.

Last modified on Saturday, 31 May 2008 01:00


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  • Comment Link Gerard Waggett Monday, 02 June 2008 10:27 posted by Gerard Waggett

    I guess this falls under the category of fuzzy math.

  • Comment Link Reggie Middleton Monday, 02 June 2008 10:15 posted by Reggie Middleton

    I am a NY native and invested in residential real estate here for about 5 or 6 years. The condo market in Brooklyn, about to implode. Queens ditto. Manhattan, more of the same. The multifamily market is imperil because much of it was purchased at negative cash flow. If rental rates soften, it will get ugly. The brownstone market is the sturdiest, and it too will fall (actually is falling). The commercial market (particularly office) is softening quickly from the last two years. Retail, well you know my thoughts - and the outer boroughs have seen an unprecedented spike in big box stores and chains, ex. target, restaurants ,etc.

  • Comment Link Reggie Middleton Monday, 02 June 2008 09:56 posted by Reggie Middleton

    I used to love Kool Aid, too! ;D ;D
    Since it may not be appropriate for me to do it, you should go to my [url=,com_uhp2/task,viewpage/user_id,62/pageid,4/Itemid,60/]personal page[/url] and download the pundit tool. Fill it out with all of the new and old stocks reviewed on this blog along with the stock prices on the date blogged. Then apply today's pricing. You will see that I don't have a lot in common with analysts and pundits you see on CNBC, et. al.

    As for Bove's article today, we hashed that out months ago in the discussion forums with StockenFraud and [url=]Reggie Middleton on the Street's Riskiest Bank - Update[/url]

    Post the updated model or send it to me and I will post it on your behalf. Let's see how the pundits really perform if you were to put some money behind their words.

  • Comment Link Kip Coon Monday, 02 June 2008 09:31 posted by Kip Coon

    Outstanding work on the Doo-Doo posts! The other day somebody posted a link to a Dick Bove article where he recommended some regional banks. Since most of what Bove recommended were on the Doo-Doo list, I put these positions on paper Friday morning. If one were to take Bove's recommendations to buy vs my personal decision to short based on what I read here, Bove would be down $2900 vs an upside of $200+ on the short side. I'll put it in a spreadsheet and send it to you. The list is buying or shorting the stock as well as purchasing calls and puts. It just depends on which side of the trade you want.
    The Doo-Doo side of the trade based upon factual data provided by you and this site or the Buy-Buy (should be by-by) side of the trade by Bove.
    Bove did have one bright moment in a Bloomberg article today. It's the article titled with: +2 + -2 = 4. A GREAT article to read, too. Bove describes "Statement 159" and how it affects company financial statements. Let's give the bozo a pat on the back for actually doing his main job as an analyst for once. Oh, if it was not already known, Bove's second job is..... well, somebody on NYSE floor should just yell: "Hey, Cool-Aid" and he'll come crashing through the wall looking like the Cool-Aid character from the adds years back (just dated myself). I'm sure many other "trusted" figures would come running in too. Wall Street, The Media, Paulson, etc. - Hopefully the public is starting to see that the Cool-Aid has been flowing for a long time.
    What I think is funny (it's actually pretty sad) is that all of a sudden, little stories of what you've been posting since LAST YEAR are starting to trickle out. The media makes it sound as if it's a recently broken story!
    Meredith Whitney will have the last laugh on those who piled on her warning comments as "overblown". There are a few trying to do the right thing!
    I'm glad I bought put positions in WB last week! I'm sure everyone will see the Wachovia CEO news today. You know, it's interesting seeing the amount of media stories that came out since the market close last Friday. Hhmmmmmmmmm??????? I wonder if it has to do with the 2nd Quarter closing? They couldn't have been hiding the balance sheet horrors in order to do some stock performance window dressing? No, that would be wrong since "the worst is over", right? Yea.... have a little more Cool-Aid America.

    Thanks for your hard work in doing the right thing with this blog. We hear all these guest speakers on the financial shows stating: "the worst is over", "now is the time to buy financial companies." If they've done half as much homework as you have, they'd be saying the opposite!

    Looking forward to the next info you have to share.


  • Comment Link JP Monday, 02 June 2008 08:46 posted by JP

    Just to clarify a point. I see home prices dropping 30% at current interest rates. If rates start to trend up then prices fall more. Also inflation has been escalating into everday living expenses, this has not been factored in.

  • Comment Link JP Monday, 02 June 2008 08:23 posted by JP

    Also been taking a look at GE and its finance unit. Additional dissappoints-writedowns to appear in their consumer and commercial finance portfolios imo. As of year end the portfolio was $646 bil. with $57.6 Bil in equity. 8.10:1 ratio debt to equity at GE capital.
    From my conversation many homeowners are now accepting the fact that housing prices are
    falling in price. Just 6 months ago denial was widespread now I see the "start" of panic.
    I say start because home prices have a ways to fall in NYC metro area. Compared to other bubble markets which are ahead in their prices corrections like Fl, CA Az Vegas, the NYC metro is going to plunge.
    It has been a long wait but it is finally here.

  • Comment Link JP Monday, 02 June 2008 07:09 posted by JP

    I expect commercial and residential (especially) to increase the speed of decline in NY and NJ. With all the finance layoffs hitting NYC and NNJ prices are going to dive. From my best estimate home prices in general are 30% overpriced from the peak in the area.

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