Will US Bancorp cut its dividend?

I've been following US Bancorp (USB) pretty closely through this credit crisis -- thanks to Jim Jubak. He thinks it is one of the few banks that will emerge from this crisis victorious, and I tend to agree with him.

The stock currently yields ~12%, but much of that is due to the fear of a dividend cut caused by the most recent earnings release. Jim Jubak's comments are below.

Will US Bancorp follow the lead of so many of its peers in the banking industry and cut its dividend? The question isn't academic to me: I had added this stock to Jubak's Picks in April 2008 because it then paid better than 5%.

Since the company's Jan. 21 announcement on fourth-quarter earnings, a majority of investors on Wall Street have been thinking the dividend is headed for a cut. A stock-price drop of 12.5% on Jan. 22 left the yield on the shares at 12.1%. You don't see that kind of a yield on a bank stock unless the market is convinced the company will cut its payout.

I can certainly see why investors think that. The bank didn't exactly give a ringing defense of the dividend in its earnings conference call. Executives said the company believes it will be able to cover the dividend from earnings in 2009 but noted that it reviews the dividend every 90 days -- which puts the next review in March -- and that the bank has no intention of continuing the current dividend if earnings don't cover the payout.

The real issue then, as the company said in its statement, is earnings for the rest of 2009. On Jan. 21, US Bancorp reported earnings of 15 cents a share. That's a profit -- unusual for a bank these days -- but still 7 cents a share below what Wall Street had expected. The problems? There were $253 million in losses on securities and a $635 million increase in provision for credit losses. All in all, charges and losses chopped 34 cents a share out of earnings.

It's also clear that the bank's business, like that of all banks I know of, is still getting worse. Nonperforming assets climbed to 1.14% in December, and the bank said it anticipated that nonperforming assets -- that is, loans that the bank can't collect on in a timely fashion -- will continue to climb in 2009. It's cold comfort to investors that the bank's performance continues to be so much better than other banks'. The increase in nonperforming assets to 1.14% in December is only a modest increase from the 0.88% in September. That indicates the bank's lending standards continue to hold up to a very difficult economy.

The bank's operating results, in fact, were quite impressive. Loans grew 17% (12.7% excluding acquisitions) and deposits 15.2% (9.6% excluding acquisitions) from the fourth quarter of 2007. (In November 2008, the company acquired Downey Savings and Loan and PFF Bank and Trust from the Federal Deposit Insurance Corp.) Net interest income grew 22.6%. Tier 1 capital remained at a strong 10.6%.

So will US Bancorp cut the dividend or not? Unfortunately, it's a danger and, also unfortunately, uncertain. It depends on how long the economy struggles and how big the losses get on the bank's portfolio of loans. I still think US Bancorp will be a winner in the current crisis, and this quarter's results are evidence that the bank is picking up loan and deposit volume as customers opt for the bank's relative safety.

Source:
Fed looks like one more shaky bank
Jubak's Journal, 1/23/2009 12:01 AM ET

10-year Treasury at 2.995%

The 10-year Treasury briefly dipped below 3% this morning. Is this a reflection of fear, deflation, or a result of all the money being poured into the system over the past few months?

Botched Bailouts

I've been following the government's many recent financial bailouts (Fannie and Freddie, AIG) and interventions (Term Lending and Auction Facilities, short selling rules, RTCII) fairly closely.

There has been much discussion of how deregulation of the financial industry lead to this crisis - especially in the case of the (former) five firms that 'enjoyed' net capital exemptions from the SEC - and how the government's recent actions smack of socialist policies.

Until Friday, I had not read anything about how these actions may have exacerbated the financial crisis. Jim Jubak does a superb job of outlining how these rescues have actually made some things worse. The whole article is worth reading, but the highlights are below.

[I]n the name of creating an orderly liquidation of a company such as Lehman Bros., they create a mad scramble to get paid before the bankruptcy court can act.

By wiping out the Fannie Mae and Freddie Mac preferred stock, the Fed and Treasury killed off any possibility that some other financial institution in need of capital could raise cash by selling these dividend-paying shares.

[T]he Treasury and Fed have ensured that no conservative, income-seeking investor in his or her right mind would buy preferred stock from a troubled financial company looking for capital.

After drawing a line in the sand and saying no more bailouts, the Fed and Treasury ponied up $85 billion in taxpayer cash to go into the insurance business. Their excuse for the about-face: Though the Fed had planned for a Lehman bankruptcy, it hadn't modeled a failure at AIG and couldn't predict the consequences of letting the company go into bankruptcy. That's not reassuring.

Source:
Botched rescues are killing markets
Jubak's Journal 9/19/2008 12:01 AM ET

The Cause of the Liquidity Crisis

Classic!


Source:
www.dilbert.com

Last Bank Standing

My wife has started a home-based business and we've been looking for the best bank to open a business checking account. Today I ask a friend if he knows which institution would provide the best service and he replies,

"If you wait a bit you'll probably only have one left to choose from :)"

That had me laughing to myself for a good 5 minutes... and I'm sure I will continue to chuckle about it the rest of the day. I hope you get half the entertainment out of it that I did.

Monetary and Fiscal Stimulus

There was plenty of talk about fiscal stimulus packages last week. The White House wants tax cuts to help a wide range of individuals and businesses. Privately, it has floated a plan that focuses on rebates of up to $800 for individuals and $1,600 for married couples.

In addition to tax cuts, congressional Democrats say they also want spending targeted at specific groups such as the unemployed. They have also discussed denying rebates to taxpayers who earn more than $85,000 and offering them to those who don't pay income taxes at all.

Despite the market's disappointment, the plan President Bush announced Friday, which is equivalent to about 1% of gross domestic product, came in at the high end of expectations in Washington.

In addition, Fed Funds futures and options show a 40% probability of 50 and 75 bps cuts, and almost a 20% probability of a 1% cut. The jump in the odds of a 75 bps cut was near Bernanke's speech on 1/11 and the wholesale trade and retail sales reports. The probability of a 1% cut increased near the consumer sentiment report and Bernanke's Congressional Testimony.

None of this will ward off a recession in the United States. The slowdown in growth isn't purely a liquidity problem. It's a confidence problem causing a lack of liquidity. Banks won't start lending to one another again until they have a better idea of who owes what. Until then they're going to continue to horde cash to shore up their balance sheets to prepare for the worst.

Further, this isn't just a subprime or even a mortgage problem (we have yet to even reach the pinnacle of the option ARM wave). Issues are beginning to surface in the commercial real estate, auto loan, and credit card secondary markets. Who knows what other credit products will follow?

The actions of the Fed and Washington won't stop the stock market's decline, or the oncoming/current recession, since this current slowdown is a confidence problem, not a liquidity/stimulus problem. And, unfortunately, the problem is likely to get worse before it gets better.

I expect the market to slowly work its way up - with a few relief/short-squeeze rallies - over the next week or two, sending major indices near their August lows (about a 5-6% gain from Friday's close). I will enter a short position in the NASDAQ 100 and/or Russell 2000 near the August lows if they are attained before the Fed meeting next week, since I expect the catalyst to the next major move down to be the outcome of the meeting.

Too Little, Too Late

According to a CNN Money article, the Fed is expected to propose rules to crack down on mortgage lending tomorrow. Some examples of the rules being considered are (emphasis mine):

• barring lenders from penalizing subprime borrowers - those with spotty credit or low incomes - who pay their loans off early.
• forcing lenders to make sure that borrowers, especially subprime borrowers, set aside money to pay for taxes and insurance.
• restricting loans that do not require proof of a borrower's income.
• examining lenders' failure, in some cases, to consider a borrower's ability to repay a home loan.
• improving financial disclosure so people better understand the terms and conditions of their mortgages and get this information when it is most useful.
• curtailing abuses in mortgage advertising.

All of these were obviously needed years ago, especially the point in bold. Probably most stated-income loans made in the past couple years should have never been originated. I say 'most' because these loans are legitimate for some borrowers, e.g. the self-employed.

It is beyond me why the Fed did not address this practice until now. How could they not know these loans were being mis-used, when it's their job to regulate the financial system?

Not only are these rules too little, too late - the market is currently addressing some of them. To ask a rhetorical question, how many lenders are currently originating sub-prime or stated-income loans?

While these rules are necessary, they will do nothing to help the current mortgage-induced liquidity crisis.

Source:
Fed to crack down on shady lenders
WASHINGTON (AP), 12/15/2007 12:08 PM ET

All in One Day

The following post is courtesy of Ryan, my good friend and fellow market-watcher. We regularly discuss the stock market. Below he provides his unique insights on today's (yesterday's) market action. So, without further ado...

I've been in banking for 7 years. I spent the first 4 years picking stocks for mutual funds, and worked on a trade desk the first 2 of those years. Those were really fun days in 2001 and 2002. Amongst other things, I witnessed the dot-com bubble burst, the first surprise rate cut by the Fed (a non-meeting 50bps cut), and Sept 11 - all from a unique perspective.

The last 3 years I've worked on the mortgage side, with the last year and half with Josh in capital markets. I have continued to follow the stock market the entire time. What is so amazing about today is that I can't remember a day quite like it. I remember many days when the market opened high, stayed high all day, and then gave back everything in the last hour... but that's nothing like today.

To put it into perspective (I'm going to use the Wilshire 5000 to represent the total market, though I'm sure you can pick any index and get a similar story):

Open: 14,923.64
9:15 AM: 15,256.52
3:15 PM: 14,820.01
3:45 PM: 14,999.82
Close: 14,994.54

The market deflated like a tire with a slow leak between 9:15 and 3:15. I can't remember such a slow, steady, uneventful decline after a strong opening during one trading day. It was really amazing to watch.

For those keeping count, the first 15 minutes returned 2.23%, or approx. 0.15% a minute. For the next 5 hours of trading, the market gradually worked its way to a -0.69% return on the day (the market's low point). The amazing thing is that anybody who bought the market at 9:15 AM had lost 2.86% in 5 hours (or -0.0095% a minute). So, they were giving away 1 minute of gains from the morning's rally every 15 minutes and 30 seconds that passed after that peak.

But the market wasn't done; then it rallied for another gain of 1.21% at the peak around 3:45 PM. That's a gain of of 0.04% a minute. The VIX showed this as the period with the greatest amount of volatility. The market finally closed with a gain 0.47% on the day.

To summarize: you have a gain of 2.23%, loss of 2.86%, gain of 1.21%... IN ONE DAY!!! If you told me these were market returns, I would tell you that was 3 separate days of activity. But nope, it happened in one day.

Today's market behavior underscores investors' ignorance of the depth and magnitude of the credit crunch. Five of the largest central banks were effectively forced to work together, and that's something to cheer about? Ironically, not long after the central banks' announcement, Wachovia and Bank Of America both issued additional warnings on their exposure. Its like the market was cheering "Yeah, they're going to get us out this mess," and then screaming "OH NO!!! THE MESS!!!".

As I write this, the Nikkei is down 1.51% (its lunch time over there right now). I guess they don't think much of the worlds' central banks' coordinated efforts either.

Freddie Mac : 2007Q3

Freddie Mac reported much worse than expected results this morning. Here are the highlights from the press release:

• Third quarter loss of $2.0 billion reflects a higher provision for credit losses and losses on mark-to-market items.
• Provision for credit losses of $1.2 billion reflects the significant deterioration of mortgage credit as a result of continued weakness in the housing market.
• Total GAAP mark-to-market losses of $3.6 billion primarily include $1.5 billion in interest-rate related items and $2.3 billion in credit-related items.
• Fair value, before capital transactions, decreased by approximately $8.1 billion primarily due to widening of net mortgage-to-debt option-adjusted spreads and valuation losses on credit-related items.
• Increase in management and guarantee income reflects continued guarantee portfolio growth.

When this 'liquidity crunch' started in July/August, investors would only buy pools securitized by Fannie and Freddie. Prior to that, it was questioned if those two GSEs were needed. Will investors be as willing to buy from Freddie now that their pools are worse than expected?

UPDATE: Some excellent answers to the above questions in Calculated Risk's comments (excerpts are below; follow the links for entire comment).

Tanta said,
The whole idea of having the GSEs continue to buy loans in this market is that they will actually bid when no one else does. That is, they are supposed to be out there saying that there is, actually, a difference between 51 bps and 450 bps and they will bid accordingly.

gse doom said,
...their [Fannie Mae and Freddie Mac] securities are "understandable" and the payment of both principal and interest is guaranteed. The loans in their securities are underwritten to more conservative and standardized guidelines, and the securities themselves are more easily analyzed and modeled. Fannie Mae and Freddie Mac guarantee to the bond holder the timely payment of both principal and interest.