Another week, another financial institution goes down right? With the news that Lehman Brothers may be put up on auction, the media is spending an inordinate amount of time on all the financial institutions in trouble and how the economy will be swallowed whole by the fall-out of the subprime mess. There is certainly some credence to the coverage but, for those of us who hold bank stocks, is it getting better, worse or neither?

Below are the stock prices of selected banks as of Friday with their 200 day moving averages in parenthesis (a 200 day moving average is, as the term implies, the average price of any stock over 200 days and is used to identify pricing trends by taking a large enough sample size to remove blips; its a good jumping off point because 200 days covers most of this calendar year). I took a cross-section of the larger banks in North America (a cross section of the largest U.S. banks; all of the Big 5 Canadian Banks).

For an apples to apples comparison all the stock prices are quoted in USD because, quite frankly, Yahoo Finance was the best source for this data and they quote in USD.

Banks trading above their 200 day moving averages as of Sept. 12:

1. Bank of America: $33.74 ($33.32)
2. Wells Fargo: $34.29 ($28.66)
3. US Bancorp: $33.83 ($31.64)
4. J.P. Morgan Chase: $41.17 ($41.00)
5. BMO: $46.35 ($45.82)

Banks trading below their 200 day moving averages as of Sept. 12:

1. Citigroup: $17.96 ($20.86)
2. CIBC: $60.63 ($63.40)
3. BNS (Scotiabank): $44.93 ($47.03)
4. RBC: $46.46 ($46.62)
5. TD: $58.55 ($62.88)
6. Wachovia: $14.27 ($21.89)

Observations?

1. It is hard to lump all banks into one category. Some seem to have recovered well (Wells Fargo and US Bancorp) while others have not (Wachovia and, surprise, TD) and others are going sideways (RBC, J.P. Morgan Chase); In absolute terms, the two banks that are trading with the greatest positive difference from their 200 day moving average, Wells Fargo and US Bancorp, have reputations for being great retail banks which reinforces my pet thesis that the safest bank stocks to invest in are the ones with the best branch networks and not the best i-bankers.
2. These are better times for Canadian banks than American banks. Of the 6 banks trading under their 200 moving averages, the only 2 off by more than 10% are both American banks. If you followed Citigroup, it was much too unwieldy of a business before subprime to be competitive for too much longer. Wachovia- I know nothing about this bank. Anyone? As for TD- this is a mystery for me especially since they just raised their dividend (who says the market is perfectly efficient?)
3. The worse seems to be over (?): I did not post it above but all the banks are well-above their 52 week lows. Even poor Wachovia is trading at nearly twice the price of its 52 week low.

But what about all the noise that the media is making? The institutions in trouble, mainly Washington Mutual (WM) and Lehman Brothers, are not banks although smaller and regional banks are also in trouble. I only highlight the big boys in banking because size does seem to matter in somewhat cushioning the blow.

WM is a savings and loan which means, generally, it invests deposits into mostly residential mortgages and cannot rely on commercial banking, commercial real estate lending, underwriting, M &A to mitigate against the collapse of the real estate market. Structurally, a savings and loan is a one-trick pony; it takes our money and invests it into residential mortgages; if the residential real estate market buckles, it is in trouble.

Smaller banks are facing similar problems as the savings and loans industry because their asset base isn’t big enough to diversify from residential mortgages.

Lehman Brothers is an investment bank. It is not primarily a deposit taking institution. It raises money from equity and debt raises and invests it. If their investment fail and the equity and debt market drys up (like now), it does not have enough cash to keep operating.

As usual, this is not a reccommendation to buy or sell. Please speak to your advisor before you consider either.

As an addendum, and as the worse time post ever, this was written before news of Lehman Brothers declaring bankruptcy and Merrill Lynch merging with Bank of America. Neither Lehman’s or Merrill is a traditional bank per se but these moves will clearly drag down the price of bank stocks. I’ll post some comments later this week on this topic.