Tuesday, May 25, 2010

Rating firm says BofA, Citi, Wells Fargo are vulnerable

Tuesday, May 25, 2010, 12:17pm PDT | Modified: Tuesday, May 25, 2010, 1:43pm
Rfirm says BofA, Citi, Wells Fargo are vulnerableating
San Francisco Business Times - by Mark Calvey
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Weiss Ratings
Some of the Bay Area’s largest banks remain vulnerable to financial difficulties or even failure based on statistical analysis of each bank’s capital, asset quality, earnings and other factors, according to a report from Weiss Ratings.

“Major U.S. banks continue to be plagued by toxic assets and an inability to raise capital,” said Martin Weiss, chairman of the firm. “Although most vulnerable banks will not ultimately fail, the failure rate could rise sharply if the U.S. experiences any further economic or financial adversity.”


■Click here to jump down to the list of weak banks in the Bay Area.
■Click here to check if your bank is on Weiss' weak list.

The challenge is that several of the nation’s biggest banks are among the most vulnerable. Their failure would have significant ramifications on the nation’s economy and taxpayers’ pocketbooks.

“The big dilemma is that many of the largest banks are still weak, while most of the strongest banks are relatively small and have fewer branches,” Weiss said.

Weiss Ratings has released its list of 2,259 weakest and 962 strongest banks in a report this week. The weakest banks control $5.8 trillion, or 43.8 percent of the industry’s total assets, while the strongest banks hold $484 billion, or just 3.7 percent, of the industry’s assets.

The only Bay Area-based bank to be identified by Weiss as one of the nation’s strongest is Silicon Valley Bank, which garnered a B-plus from the ratings firm.

But Bank of America (NYSE: BAC) got a D; Citibank, (NYSE: C) D-minus; HSBC, D; Union Bank, D-plus; Wells Fargo (NYSE: WFC), D and ; Wachovia, now part of Wells Fargo; D.

"We have continued to grow market share and earn more of our customers’ business while undertaking the largest merger integration in U.S. banking history and despite the challenging economy," a Wells Fargo spokesman told the San Francisco Business Times via email. "We have provided $711 billion in loans and lines of credit to help get the economy going again."

Weiss said it dropped its practice of charging consumers for its ratings service.

“Given the severity of this situation and the growing difficulty of finding a truly safe place for their money, we have decided to end our former business practice of charging consumers for our ratings,” Weiss said.

The large bank’s financial vulnerability comes as little surprise to long-time industry observers. Warning flags have been flying high.

J.P. Morgan Chase (NYSE: JPM) CEO Jamie Dimon, speaking in March at Stanford University, called for a systemic way for large banks to go out business so that the market would more accurately price their cost of capital. Fitch Ratings has already warned that BofA and Citi would have lower ratings if not for the implied backing of these huge institutions by the U.S. Treasury.

And even signs of optimism come with cautionary footnotes.

For instance, Brian Pretti, chief investment strategist, at Richmond-based Mechanics Bank, (OTC.BB: MCHB.OB) told the company’s private banking clients this month that about 70 percent of the decline in consumers’ credit-card balances industrywide represent charge-offs, not repayment. Mechanics is not on Weiss' weak-banks list.

And Bank of America is sitting on an inventory of 100,000 foreclosed homes -- just in California, a source familiar with the situation told the San Francisco Business Times on Tuesday.

Some observers are also concerned about the big banks’ derivatives and proprietary trading operations that gave a huge lift to first quarter results.

Charlie Munger, vice chairman of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) and chairman of Wesco Financial, (AMEX: WSC) told investors attending the Wesco annual meeting recently, that he’d reshape J.P. Morgan Chase.

“The world would be better off if J.P. Morgan didn’t run a gambling casino alongside a legitimate business. I take my hat off to Dimon, but I’d take away his derivative book in a second,” Munger said, according to a report posted by Morgan Housel on the Motley Fool website.

Another challenge for the banks that Weiss describes as among the nation’s weakest is that the public’s appetite for another huge bank bailout has waned.

One sign of public opinion is a San Francisco Business Times editorial published last December as major banks raced to exit TARP and its pay restrictions.

“For the big banks who wish to put it behind them, the feds should help them pack and escort them to the TARP door as soon as they are healthy enough to do so. Then that door should be closed behind them — slammed, locked and bolted shut,” the newspaper said. “TARP, or anything like it, can’t be there for bankers in the future.”

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