Banks in the Danger Zone

On the heels of the failure of IndyMac Bank, Richard Bove at Ladenburg Thalmann has run a few screens on bank stocks to see who else may be in danger of failing.

In a report, he looks at all the FDIC-backed institutions, comparing each bank’s bad loans to its overall assets through two ratios. First, he divides the “non-performing assets” of an institution--bad loans, late loans, foreclosed assets--by all of its outstanding loans. “A ratio above 5 percent suggests danger.” The overall industry ratio is below 2 percent.

Downey Financial, Corus Bankshares, Doral Financial, FirstFed Financial, Oriental Financial, and BankUnited Financial all have danger zone ratios with Downey the highest at 13.6%.

Then Bove ran a second set of numbers dividing a bank’s non-performing assets by its reserves plus common equity. “A ratio about 40 percent is the danger zone.” You have all the same names as listed before, PLUS WASHINGTON MUTUAL which comes in with a ratio at 40.6 percent. Bove calls this being “on the edge” of danger but not quite there yet.