Union Bank's Shares Dip On News of Loss Reserve
Union Bank's stock price tumbled more than 10% late last week, even though investors were generally braced for bad news from California banks.
The San Francisco-based bank more than doubled its loan-loss provision, claiming the one-time set-aside would cover all its sour loans related to real estate.
Union Bank was one of the last holdouts among California banks with sizable real estate loan portfolios. As recently as August, analysts had praised Union Bank as a smart, conservative lender.
A few weeks before the recent announcement, the bank's executives had told analysts that third-quarter earnings would fall about 30%. Instead, they fell nearly 100%.
Once Burned, Twice Shy
Now chastened, analysts warned investors to expect further tremors.
"The first increase to reserves is never the last increase," said Livia Asher, an analyst at Merrill Lynch & Co.
Certainly, California real estate problems are far from over. And Union Bank, with $16.6 billion in assets, is the fourth of the six biggest California banking companies to take sizable provisions for bad loans or to charge them off.
Thursday, Union Bank announced it would add $90 million to loan-loss reserves and expects "nominal" third-quarter profit.
Share Price Falls
Before the announcement, investors sensed trouble and dropped the stock almost two points to $21 per share, before trading was halted in the morning for most of the day. The shares continued their slide in subsequent trading, closing Monday at $20.50.
"California real estate has been deteriorating for a while," said Ms. Asher. "We are not near the end of it yet." However, analysts said California's diverse economy and sizable influx of new residents would prevent it from turning into the next New England.
Even with the loss provision, Union Bank may not be in the clear. About 20% of its loan portfolio - or $2.2 billion - is for construction, double the typical proportion. Nonperforming assets are expected to climb to $480 million, a 34% increase from the second quarter, indicating a potentially sizable amount of chargeoffs if the loans remain bad.
Ever optimistic, Union Bank executives said last week that they believed the one-time boost to reserves would be sufficient to cover all potential loan problems. The bank said its unfunded real estate commitments are limited to build-to-suit housing, which carries less risk of default.
"We don't anticipate big provisions in the future," said Don Brunell Jr., senior vice president.
This time, analysts were skeptical.
"Union Bank said they expect nonperforming assets to continue to increase," said Campbell Chaney, an analyst at Sutro & Co., San Francisco. "In my experience, banks rarely take just one hit."
Part of the reason for the stock's price nosedive was the small number of shares traded. Bank of Tokyo owns 77% of the bank, which is the fifth-biggest in California.
Sam Zuckerman in San Francisco contributed to this report.
In average to light trading volume, PNC Financial Corp. was the only hot stock. Its share price rose $1.875, to $40.875.
PHOTO : Decline and Fall