Editor's Note: In this edition of "360 Degrees," RealMoney commentators take a look at Compass Bancshares (CBSS). Has its heavy real estate lending compromised its financial foundations, or does its strength in other areas cancel out this weakness? TheStreet.com has always believed that offering a wide variety of opinions and viewpoints -- rather than a monolithic "house view" -- helps readers make better-informed investment decisions. In that spirit, we bring you "360 Degrees." "360 Degrees" is a feature that takes advantage of our varied stable of contributors to RealMoney, who offer analysis of stocks and the markets from all angles -- fundamental vs. technical, short-term trader vs. long-term investor. Click on the following link for information about a
free trial to RealMoney.
Compass Is Overexposed to Construction Loans, by Richard SuttmeierReal estate lending has reached levels unparalleled in the history of the U.S. economy, even adjusted by inflation. The riskiest of the lending is construction loans, which go to contractors and homebuilders to finance housing projects and developed communities prior to owner occupancy. This is an area where a glut of unsold properties could develop. Activity has expanded so fast that some of these loans have filtered down to so-called "pickup truck builders," who are likely to walk away from uncompleted projects sooner rather than later, leaving the community bank holding the financial bag. As the country's bankers expanded their balance sheets to lend to developers, builders and contractors, a number of federal agencies moved to address the potential financial stresses. The Federal Deposit Insurance Corporation began to compile real estate loan risk data from banks in the fourth quarter of 2005. It is computing two ratios. The CD loans ratio measures construction lending vs. total Tier 1 risk-based capital; when this ratio exceeds 100%, it's a warning. The CRE loans ratio measures the total of construction, multifamily and commercial real estate lending vs. total Tier 1 risk-based capital; when this ratio exceeds 300%, it's another warning. I've screened for publicly traded banks with assets of more than $1 billion and a CD loans ratio of 200% or more at the end of the first quarter, twice the FDIC risk guideline. The result was a list of 50 institutions that could be set up like dominoes, should builders and contractors walk away from incomplete projects that are already funded. Compass Bancshares made the list with a CD loans ratio of 242%. Of these 50, it is second in size with assets of $32.842 billion. It has $5.144 billion in construction loans on the books, supported by $2.126 billion in Tier 1 capital for the CD loans ratio of 242%. This overexposure is of concern to the FDIC and should thus be a concern to investors. These ratios are new, and Wall Street analysts to my knowledge have not yet recognized the risk. The data are not included in quarterly earnings reports, and the bloated balance sheets may even project an improving earnings picture, but in my judgment, it is a ticking financial time bomb.
Compass is rated a hold by ValuEngine with fair value at $50.56. The weekly chart profile ended last week with overbought momentum (12x3 weekly slow stochastic) with the five-week modified moving average at $54.90. A close this week below $54.90 would shift the weekly chart profile to negative. My model shows Compass to be between quarterly and monthly pivots at $53.24 and $56.68, where investors should consider reducing holdings. Below this range, there is risk to my annual value level of $48.23.
There isn't much to love or hate in the chart of Compass Bancshares right now. The strong uptrend in this leadership issue stalled out in early June, and the stock dropped into a sideways grind. This consolidation might turn out to be a bullish triangle or a bearish topping pattern. This uncertainty tells current investors to hold on tight and wait for the stock to make up its mind. It also warns other interested parties to stand aside until this range-bound market yields a new trend, higher or lower. That resolution might take another four to six weeks.