US banks - the new understanding of being "healthy"

As an investor, would you touch the following bank with a cattle prod?

Its total assets dwarf common equity by 25 times to one – higher than the average for US banks over the past decade. Think of this another way: just a 4 per cent hit to the balance sheet and wave goodbye to shareholders’ equity. Even comparing tier one capital with risk-weighted assets reveals that its gearing is 14 times.

What about those assets then? Barely at the start of a household deleveraging process that will last for years, two-thirds of its outstanding loans are to consumers, with mortgages accounting for quarter and credit cards for 10 per cent. Yet its non-performing loan ratio of 12 per cent for mortgages in the first quarter, for example, was the highest of all the banks that are covered by Barclays Capital. That ratio increased by almost 250 basis points versus the previous quarter, and there are few signs that house prices have stopped falling yet.

Then there are its off-balance sheet investment vehicles. This bank still has a $93bn exposure – eclipsing common equity – a third of which relates to conduits that purchase securities funded by commercial paper. True, outside investors are technically first in line to take any hit. But if things get really bad, banks usually have to step up. What is more, it has so-called “level three” assets equivalent to 126 per cent of tangible common equity. These are assets which cannot be valued using observable inputs such as market prices – you just have to trust the bank’s internal calculations.

Finally, like all banks, its past earnings power will be diminished due to lower economic growth and rising regulation. Unlike others, however, it is now free from the troubled asset relief programme. It is also considered by far the healthiest of the big US banks.

http://www.ft.com/cms/s/2/30c72c94-55c6-11de-ab7e-00144feabdc0.html