Only 30% of U.S. publicly traded single-bank holding companies are on track to post higher Tier 1 capital and the rest will likely experience capital erosion, according to a study by Invictus Group.
The new benchmark study of Tier 1 capital needs of U.S. publicly traded single-bank holding companies over the next two years found that investors continue to fail to factor stress testing into their analysis thereby resulting in mispriced holdings.
The report highlighted that professional investors, including institutional money managers and hedge funds, for which bank stocks are one of the largest investment segments, might be relying excessively on widespread traditional analytics to evaluate the financial health of their holdings.
“A sound stress testing program is not a substitute for pro forma analyses and forecasts, but a crucial complement to analysis and we’re not seeing that,” said Kamal Mustafa, CEO and founder of Invictus, and a former senior banking executive.
Without broader stress testing, investors might be mistaken in their analysis of those banks stocks that will be in need of capital and those having solid financials and expansion opportunities that will transcend present conditions.
“Given the numerous cross-currents in today’s economic and financial environment, not taking the stress in loan portfolios is shortsighted,” Mustafa said.
The market to date has not yet made those adjustments as shown by the fact that 12% of the single-bank holding company stocks on the NYSE/AMEX/NASDAQ with a price/tangible book of less than the mean of 1.09 showed increases to Tier 1 capital under stress, according to the report.
Similarly, 19% of the same exchanges-listed group with price/tangible book values of over 1.09 show a loss of Tier 1 capital, suggesting that banks that are under provision and thus register higher earnings attract unwarranted but greater market relative value.
“Frankly, looking at the drastic impact the moribund economy has had on the banking system and the potential negative drag caused by the unresolved problem assets still on banks’ books, it is virtually inconceivable that the market has ignored this,” Mustafa said.