We'll See M&I Played Over And Over

I continue to dislike almost all banking stocks. The only positive they have going for them is a large short position that could trigger a short lived spurt upward on any bullish news, but I don't believe it would be sustainable.

Banking faces large earnings headwinds and those are not all credit and spread driven issues. All banks have had to change their approach to excessive overdraft fees and now they face a dramatically smaller fee stream on debitcard transactions. Any real estate refi mini-boom is nearing an end as interest rates are rising, so the non- interest income contribution to earnings is going to be putrid.

On the interest income side of the P&L, I don't think banks can build enough reserves, through earnings, to cover past lending mistakes. They just have to keep doing what the banks and government have been trying to accomplish, and have to a large degree, that is talk a good story, defer losses, and raise equity. So far so good, unless you were among the diluted. Loan demand is anemic, bond yields minimal, and trading is being curtailed. I don't look for growth in net interest income. You won't reverse those trends by what a bank can earn on excess reserves held at the Fed.

I don't think a big short position and the prospect of dividend increases are more important than the lack of earnings growth in the long run. plus the guys running the banks today are proving to be less than brilliant as some some are already treading back into past mistakes. Credit card banks are already offering credit, at higher rates, to strategic and first time defaulters! Where are the regulators and Boards of Directors?

M&I was a good case of the walking wounded and sold to Bank of Montreal for about 1/2 book. More will be forced into the arms of the world's remaining healthy banks. Regions, Suntrust, Fifth Third, Huntington,Key etc. all are some degree of toast as they probably aren't too big to fail and will be forced into a sale at some fraction of book value as earnings growth will not be adequate to keep the balance sheet sound.

Credit Isn't The Only Thing Hurting Banks

I possess 20 years of commercial banking experience, 10 of those as CEO. Even though the industry has changed dramatically in the nearly 20 years I have been out of banking, I feel that I should be able to spot trends, analyze financial statements, and differentiate a good bank from a poor performer. This past year has shown that I can't.

Short positions on numerous financials made me a decent amount of money, but it could have been a fortune had I not always removed my position after a nice gain since they continued to trend downward. All the money I made on shorts, and then some, was lost on a bank turnaround that I was convinced I had figured out, National City. It's a long story, but suffice to say that I had twenty pounds of analysis that turned out to be faulty. 

Being a slow learner, I still follow the banks and look at opportunities. The sharp run up that the banks have experienced isn't sustainable. The yield curve is very lucrative at present and mortgage refinancing fees are plentiful. But in a de-leveraging economy good lending opportunities will be much scarcer than at peak earnings. Lower future earnings leads to lower P/Es and stock prices. Not to be forgotten are the huge loan losses that loom and the eventual dilution that will follow capital raising.

On top of the credit problems that bankers are dealing with, their buddies at the FDIC are adding to the banks misery. Since regulators have done such a poor job of controlling bank lending quality, on and off balance sheet, the FDIC Insurance Fund is in need of replenishment. Besides raising the deposit insurance fee, FDIC has levied a special assessment of 20 basis points. That is huge! At cocktails the other evening the president of a local 200MM bank told me his assessment was going to be $400,000! That is an immediate hit to earnings, or if the bank doesn't have earnings, book value.

Our banks will be earnings constrained for some time.

After all the stress test publicity abates and banks possibly enjoy an upward run, the trend is likely to be down. Since I have proven to myself that i know nothing about the industry anymore, I intend to short selected regional banks and stay with those positions. But for heavens sake, don't follow any of my advise when it comes to banks.