Report Says Use of Traditional Bank Analytics in Present Economic and Financial Environment without Advanced Stress Testing Approach Poses Pitfall for Investors

NEW YORK and LONDON, July 27, 2011 -- Despite concerns over stress testing levels, a new benchmark study of Tier 1 capital needs of U.S. publicly traded single bank holding companies over the next two years by the Invictus Group LLC, indicates that investors continue to fail to factor stress testing into their analysis thereby resulting in mispriced holdings.

Invictus said its study shows that with only 30% of U.S. publicly traded single bank holding companies on track to post higher Tier 1 capital and the rest likely to experience capital erosion, the market’s analysis of bank stocks are lacking. “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.

“Our latest report underscores that professional investors, including institutional money managers and hedge funds, for which bank stocks are one of the largest investment segments, may be relying excessively on widespread traditional analytics to evaluate the financial health of their holdings,” he explained. “Given the numerous cross-currents in today’s economic and financial environment, not taking the stress in loan portfolios is shortsighted.”

The market to date has not yet made those adjustments, evidenced 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.

Similarly, 19% of the same exchanges-listed group with price/tangible book values in excess of 1.09 show a loss of Tier 1 capital, suggesting that banks that under provision and thus register higher earnings attract unwarranted but greater market relative values.

“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,” commented Mr. Mustafa.

“Reported bank financials, on which the typically traditional analytics are based, are highly questionable and fail to take into account three crucial variables: current and anticipated disruptions across the entire loan portfolios, time lags resulting from reporting delays by customers, and credit reclassification delays with banks.”

One result, Mr. Mustafa emphasized, is that without broader stress testing investors may 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.

According to the Invictus study, based on its ICAM™ program stress test, among the nation’s 994 publicly traded single bank holding companies:

• 708 (71%) will show a decline in Tier 1 capital.
• 228 (23%) of the total show Tier 1 capital levels falling below 8%.
• 63 banks can potentially see an 80% decline in Tier 1 capital.
• And 766 will have sufficient Tier 1 capital
  

Although Invictus stress tests all U.S.-based banks each quarter, for purposes of this analysis it has excluded multi-bank holding companies. The current report is based on publicly available first quarter 2011 data, and projects Tier 1 capital two years hence.

Invictus has stress tested all single bank holding company US-based banks, and its studies, including back testing of its data, indicate that current bank analytics have restrictive limitations because of their reliance on data from audited financials and historical trends. Also, attempts to quantify stresses through pro forma adjustments are several steps removed from the actual events that create and define bank provisioning.

Invictus believes that any forward-looking stress tests should take into consideration many factors: specific bank loan distribution, regional distribution, date of origination, timing of current maturities and interest rate resets, loan to asset values, specific loan probabilities of default, and existing and expected loan classifications by loan type. It has found that the impact of the stresses on banks is considerably different based on these factors, and that the impact on the banks’ Tier 1 capital is likewise importantly different even in a steady state jobless recovery.

“The estimated changes in Tier 1 capital directly imply changes in regulatory compliance, provisioning adjustments and profitability. All these factors are integral to any bank analysis,” said Mr. Mustafa.

Invictus’ analysis shows there is a substantial difference between the health of NYSE/AMEX/NASDAQ banks and that of the pink sheets banks:

• 63% of the NYSE/AMEX/NASDAQ will have a decline in capital, while 76% of the pink sheet banks will decline.
• Of the 60 banks showing an 80% decline, only 9 are NYSE/AMEX/NASDAQ but 51 are pink sheets, demonstrating more weakness in the smaller banking sector.

In response to requests Invictus is providing on its website (www.invictusgrp.com) graphics on subsets of public banks that illustrate the importance of stress testing in any bank analysis. The assumptions used in these stress tests are applied consistently to all banks, primarily assuming that the present jobless recovery continues relatively unchanged for the next two years. No assumptions regarding interest rate changes or other potential federal financial actions are included in this simplified analysis. This approach allows an accurate comparison of the public banks and the relative changes in their Tier 1 capital.

About Invictus
Invictus (www.invictusgrp.com) was established in 2009 as an independent financial risk management and advisory firm. The Invictus senior management team has a depth of experience in international banking, regulation, information technology, credit, liability management securitization, insurance and investment banking. They recognized that today’s difficult global economic environment renders traditional analytical methods inadequate to evaluate a bank’s capital requirements – and have created a new and superior methodology for the financial services industry that generates a range of analytical reports providing unprecedented insight into the banking sector. Invictus’ advisory services are competitive positioning, merger and acquisition screening, and risk analysis among others.

Contacts:

In the U.S.

Kamal Mustafa, Chairman (kmustafa@invictusgrp.com)  
Lenny DeRoma, President (lderoma@invictusgrp.com)
+1 (212) 661-1999      

In the U.K.

Chris Page, Managing Director (cpage@invictusgrp.com) 
Ian Harvey, Managing Director (iharvey@invictusgrp.com )                                                                              
(+44) 20-7031-8155

 

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