California bank stocks: Herd gets thinned again
There’s no middle ground left in the field of California-based publicly traded banks.
With the takeover deal announced Monday for Union Bank parent UnionBanCal Corp., the list of publicly traded banks with headquarters in the Golden State begins with $609-billion-asset Wells Fargo & Co. -- and then drops all the way down to Beverly Hills-based City National Corp., with $16 billion in assets.
San Francisco-based UnionBanCal, with $60 billion in assets, has been the second-largest publicly traded bank headquartered in California. Pasadena-based IndyMac Bank had been No. 3 -- until the government declared it insolvent last month and seized it.
Of course, Union Bank isn’t going anywhere. And it already had been 65%-owned by Japan’s Mitsubishi UFJ Financial Group; the Japanese parent is just buying the remaining 35% now, for $3.5 billion.
As for IndyMac, the Federal Deposit Insurance Corp. is looking for a buyer.
Consolidation has been shrinking the number of U.S. banks for the last 30 years and it’s unlikely to stop soon.
Managements of many smaller California banks naturally want to believe they’ll survive consolidation. The bigger question at the moment is how many will survive losses on real estate loans -- particularly if troubles worsen in the commercial-property sector.
The state’s real estate woes mean investors who would like to bargain-hunt for other potential takeover targets among the remaining California banks face a minefield. Pick the wrong stock and you could lose it all, a la IndyMac.
Mitsubishi UFJ has made clear it wants to buy other U.S. banks. Brent Christ at research firm Fox-Pitt Kelton tells my colleague E. Scott Reckard that if Mitsubishi were to shop for other California lenders it would probably seek out those that have weathered the credit storm better than others so far. That would be a logical strategy for any potential buyer.
Christ mentioned two possible targets: San Rafael-based Westamerica Bancorp, which operates in Northern California and the Central Valley; and PacWest Bancorp, the parent of Pacific Western Bank, which has branches in Los Angeles, Orange, Riverside and San Bernardino counties as well as its home turf of San Diego.
As for City National, it would be a relatively small ticket for a deep-pocketed buyer: With the shares down 37% from their peak in mid-2007, the bank’s market value is $2.4 billion.
Analyst sticks up for Downey
Wall Street has plenty of doubts about the survival of Downey Financial Corp., as the Newport Beach-based lender’s $2 share price indicates.
One analyst is sticking his neck out, asserting that Downey won’t follow IndyMac Bank into the ranks of failed lenders.
Christopher Whalen, a partner at Hawthorne-based research firm Institutional Risk Analytics, says that despite Downey’s high mortgage defaults, “hysteria and media hype” may be obscuring the value in what he considers a strong retail banking franchise.
He thinks the firm’s $60-million stock market value is “silly” -- as in, way too low -- even assuming what he says are worst-case numbers for future loan losses.
Whalen warned more than a year ago of massive losses in the banking system because of the subprime debacle. So he has street credibility.
Part of Whalen’s defense of Downey rests on the fact that the $13-billion-asset thrift has a strong core base of deposits, and therefore doesn’t depend on the kind of hot money (i.e., “brokered” deposits) that funded IndyMac Bank.
But as one commenter notes on the SeekingAlpha investing site, where Whalen’s commentary has been posted, Downey’s solvency depends on whether it has enough balance-sheet capital to handle another wave of loan markdowns. The deposits may stay put, but a bank with no capital cushion is a busted bank.
Whalen seems to be betting that a deep-pocketed acquirer will see the potential long-term value of Downey’s deposit and lending franchises before the thrift has to take more write-offs.
But Wall Street isn’t willing to bet that common shareholders will get much of a premium even if a deal were to happen.
After all, with Downey’s bad loans now accounting for 11.4% of total assets (not counting what the thrift calls its “performing” troubled debt), the company isn’t negotiating from a position of strength.