For Ron Thomas' IndyMac earnings summary, please click here .
There is obvious reason to believe that IndyMac Bancorp
(IMB)
has turned the corner in its mortgage banking operations. The jumbos will be bought and held by the government-sponsored enterprises now, which will have a disproportionate effect on a company with a lot of its business in California. There is more evidence that the capital markets are starting to open up slightly. Management says that the first quarter's after-tax loss will be down 50% to 65% from the $509 million ($6.43 per share) loss of the fourth quarter. That would be a loss of $2.21 to 3.16 per share, or without one-time severance equal to 25% of the loss, $1.66 to $2.37. The average Street estimate is for a loss of $1.92 per share, so things look like they are getting better on a quarterly run basis.
Obviously, that does not mean much to investors as one looks at the stock price performance lately, and it should not. Management was too optimistic when the fourth quarter was announced by saying that it expected to be profitable in the second quarter, which looks very unlikely, considering first quarter's guidance. I am not sure that even the first-quarter number is below many Street estimates made right after the fourth-quarter report.
The problem is that it is clear from the Fannie Mae
(FNM)
report and call that, while subprime losses are fairly well understood, the Alt-A losses are now beginning to ramp up quickly. The most important part of the call will be the Alt-A credit quality numbers and discussion, given the worries about fraud in Alt-A generally and the probable feeling among investors that Fannie Mae (even though its management admitted to some sloppy underwriting on Alt-A) has a better underwritten portfolio than most mortgage bankers and S&Ls. Hence, I see no reason for the stock to move up much until there is more optimism on the end of the tunnel on Alt-A. Where I had thought that IndyMac could have been profitable in the third quarter, I would now think the fourth quarteris more likely.
I am starting to become a bit concerned about management's strategy of shrinking the company's balance sheet along with its lending operations to keep its capital ratios in line. What effect might that have on its market share of mortgage originations when they finally turn decisively up?
In this environment for Fannie Mae and American International Group
(AIG)
, I should note that the most bearish loss estimate for IndyMac has $1.1 billion in higher loan losses to be sustained over the next two years, resulting in a $4.25 per share loss in 2008 and a 10 cents per share loss in 2009. While this analyst sees the company remaining adequately capitalized under this scenario, investors should note that the timing of that loss estimate between the two years could have a substantial effect on the IndyMac's capital ratios.
At the time of publication, Thomas had no positions in the stocks mentioned.
