(The following story is the second in a two-part series discussing the Congressional Oversight Panel's report on banks at risk from high concentrations in commercial real estate loans. The first group of bank stocks was featured last Tuesday.)NEW YORK ( TheStreet) -- The U.S. government says community banks are imperiled because, unlike Citigroup ( C - Get Report) and Bank of America ( BAC - Get Report), they issued a higher share of commercial real estate loans. The Congressional Oversight Panel said Feb. 11 that almost 3,000 of the country's 8,100 banks and thrifts had "problematic exposure" to commercial real estate and related loans. "There's been an enormous bubble in commercial real estate, and it has to come down," said Elizabeth Warren, chairman of the committee, the group created by Congress to monitor the financial industry's bailout. Since the report came out, TheStreet.com reviewed the largest U.S. publicly traded banks with high concentrations in commercial real estate, or CRE, loans. Three of the second group of five banks that meet the Congressional Oversight Panel's criteria for "CRE-concentrated" show significant weakness. These are banks with loans for construction, land, commercial real estate and multifamily residences exceeding 300% of total capital, or construction loans exceeding 100% of total capital. Of the 10 banks reviewed this week and last, seven have decent or better loan quality, and five remained profitable through 2009. Along with the committee's criteria and outlook, TheStreet.com discussed these profitable five banks last Tuesday.
While the bank was profitable for the first three quarters of last year, a fourth-quarter goodwill impairment charge of $1.6 billion and a $1.1 billion provision for loan-loss reserves led to a $1.9 billion net loss for the full year. Compass is an example of a CRE-concentrated bank that is already feeling the pain. However, it represents less than a 10th of Banco Bilbao's total assets, with the holding company's business spread across South America, Mexico, Europe and the U.S. Deutsche Bank ( DB) analyst Carlos Berastain Gonzalez has a "buy" rating on BBVA, saying the shares could rise by a third over the next year. The holding company reported net attributable profit of 4.2 billion euros for 2009 (roughly $5.8 billion), down from 5 billion euros in 2008. BBVA's American depositary receipts closed at $13.89 on Thursday, down 23% this year. Societe Generale analyst Patrick Lee also has a "buy" rating on the shares.
Despite the losses, a combination of a reduction in the bank's loan portfolio and some capital from the holding company increased the bank's tier 1 leverage ratio to 8.94% and its total risk-based capital ratio to 13.13% as of Dec. 31, up considerably from 5.96% and 10.55% a year earlier. Those ratios need to be at least 5% and 10% for most banks to be considered well-capitalized. RBC Bank (USA) didn't participate in TARP. Like Compass Bank, RBC Bank (USA) is relying on its holding company as a source of strength through the crisis. In a report supporting his firm's "neutral" rating for Royal Bank of Canada, Bank of America Merrill Lynch analyst Steve Theriault said significant declines in fourth-quarter trading revenue for JPMorgan Chase ( JPM - Get Report) and Citigroup ( C - Get Report) indicated a similar decline would be reported by Canada's largest bank for its fiscal first quarter, which ends Feb. 28. The shares closed at $54.42 on Thursday, up 3% this year. Theriault's one-year target for the shares is $56.
East West Bancorp was strongly capitalized, with a tier 1 leverage ratio of 10.24% and a total risk-based capital ratio of 17.65% as of Dec. 31, although it owes the government $306.5 million in TARP money. In the holding company's fourth-quarter conference call, Chief Economic Officer Dominic Ng said the company was aiming to repay TARP this year, but wasn't sure if it would need to raise common equity to do so. While East West Bank has had significant commercial loan losses through the crisis, it has weathered the storm and nearly doubled in size with the United Commercial acquisition, which expanded its potential to profit from trade financing for U.S. importers doing business in China. The shares closed at $16.21 on Thursday, up 3% this year. Zions First National Bank Zions First National Bank of Salt Lake City is the main subsidiary of Zions Bancorp ( ZION - Get Report). The holding company owes $1.4 billion in TARP money. Zions Bancorp raised about $1 billion in tier 1 capital during 2009 by issuing new common shares and other moves, including modifying subordinated debt and heavily discounted redemption and conversion of preferred shares. While a tier 1 leverage ratio for Dec. 31 isn't yet available, the company's tier 1 risk-based capital ratio was 10.37%, well ahead of the 6% required for most banks to be considered well-capitalized, despite a net loss of $1.2 billion for 2009. The holding company's nonperforming-asset ratio was 5.17% as of Dec. 31, having risen steadily from 2.31% at the end of 2008, but the shares have recovered from fourth-quarter fears that Zions wasn't sufficiently writing-down distressed securities. The stock closed at $17.72 on Thursday, up 38% this year.
CEO Harris Simmons said during the bank's fourth-quarter earnings call that Zions "saw very little increase" in credits categorized as special mention, substandard or doubtful, meaning it identified few additional commercial loans with problems. The shares are likely to remain volatile, with the possible continued rise in nonperforming loans and potential share sales, before the bank repays TARP.
-- Reported by Philip van Doorn in Jupiter, Fla.