Is there a banking crisis in the United States?
Is there a banking crisis in the United States?
  The banking crisis: is there one?  For the past three days, I've been trying to get my hands around  this supposed "banking crisis," particularly in Europe.  I get why there is concern in Europe, but I don't at all get the  selloff in U.S. banks.  You didn't know there was a banking crisis?  Everyone seems  to think there is some kind of crisis because the  stocks—particularly the European bank stocks—seem to be  telling us something is wrong:  European banks YTD  Deutsche Bank   down 34.6%  Societe General  down 25.8%  BNP Paribas        down 24.3%  Banco Santander  down 24.0%  UBS                       down 20.9%  Yikes!  This is after one month.  The concerns about  Europe fall into several buckets:  1) ongoing restructuring and litigation charges.  2) Flattening yield curve/negative rates.  3) slower European growth.  4) Asset management slowdown. Asset management has suffered  because wealthier clients aren't investing.  5) Book value issues:  European banks did not take the big  writedowns that U.S. banks took; there's concern there may be  more asset writedowns that would cause book values to decline.  6) Capital positions. While the U.S. banks were out raising  capital and selling new shares in 2008-2009, the European banks  didn't. The result: U.S. banks don't need to raise capital, but  European banks probably do.   I get this. What I don't get is what's going on with U.S. banks:  U.S. banks YTD  Fifth Third             down 24.8%  Bank of America  down 24.3%  Zions                      down 21.9%  Key                         down 19.7%  JP Morgan            down   14.8%  Yikes again!  Even the regionals are getting hit.  Here's the arguments against U.S. banks:  1) international exposure. If you're afraid of the Chinese  bogeyman, fine. But regionals who lend to farmers are down too.  This might mean something to Citigroup, but your average regional  bank does not have international exposure.  2) falling yields.  Concerned about lower rates? It's  certainly an issue, but consider this:  the average U.S.  bank has 40 percent or more of its revenues from fees, not rates.     3) we don't believe the book value. Bank stock investors cannot  believe that big banks are trading at a significant discount to  their tangible book value:  Tangible book value  Goldman Sachs       0.93  Regions Financial   0.89  Bank of America      0.82  ZIons                        0.75  Citigroup                   0.66  Below book value, every one of them. This is pretty rare: outside  of 2008, these stocks have not traded below tangible book value.  Don't believe the book value? Here's the problem with that  argument: the quality of the book is far better than it was 10  years ago. Bank loans have a 3 to 7 year duration. After 2009,  you know what happened if you're a bank:  the government  moved into your office. The scrutiny is intense. You're lucky if  you get a 60 percent loan-to-value ratio.   Bottom line: the Fed knows every loan the banks have, and they  check them twice a year.    4) oil loans.  This is the big bogeyman, but the stocks are  trading like everything is worthless and everyone is going out of  business.    Let's take an example. To eliminate international exposure, let's  stick with a regional bank.  How about Zions?  It's a  plain-vanilla Utah bank. Straight-ahead commercial and retail  banking, along with mortgage loans.    No international exposure. No trading exposure.  They have roughly $40 billion in loans, of which almost $3  billion (7 percent) is in energy. Tangible book value is $5.7  billion.  Market cap is $4.3 billion.The difference is $1.4  billion.    If there was some kind of loss, the pre-tax hit would be $2  billion.  But the energy portfolio is $3 billion, so the  market seems to be assuming that ZION could have a complete loss  of almost 70% of the energy portfolio.  And bear in mind  they already have a 5% loan loss reserve against the energy  portfolio, so really the market is assuming 75 percent losses.  You also should know that the recovery rates on failed energy  assets are very high.  The banks have a lot of protection.  Paul Miller, a bank analyst with FBR, was on our air earlier with  the same point:  the assumption is that the entire energy  portfolio of these banks are worthless, which makes no sense at  all.    But no one wants to listen.  No one wants anything with  energy exposure.  The short answer is, it doesn't make sense, and that's why bank  stock traders—and analysts—are puzzled.  And so we have conspiracy theories.  "It's the quants."   "It's the machines."  "It's the momentum guys."    I have no doubt that shorts—in whatever form—are  pushing these stocks as far as they can go, into irrational  territory.  I am quite sure that "the machines" benefit  during times of volatility, because pricing is wider and they  benefit when that happens.  But let's limit the hysterical rhetoric.  What is happening  now is that guys who were long these stocks (hedge fund types,  generalists) are being forced to sell simply to  reduce  exposure.  It's forced selling.  These guys know that  the fundamentals are good:  the consumer is stronger, the  books are stronger—but they can only take so much downside  before they have to reduce risk.  Let's hope that some sanity returns soon.