Smaller banks struggle to recover, failure rate higher in 2010 than 2009

While most sectors and metrics of the U.S. economy have improved or at least stabilized, bank failures have actually increased in 2010 from both 2009 and 2008.

So far in 2010, 118 U.S. banks have already failed, compared to the 84 banks that have failed January 2009 through August 2009, according to the FDIC.

Including August numbers, banks are failing at the rate of 14.75 banks per month in 2010. At this rate, there will be 177 bank failures this year, compared to 140 in 2009 and 25 in 2008.

The vast majority of failed banks from 2008-2010 have been smaller banks that have less than $10 billion in assets -- in fact, about 80 percent of all failed banks had less than $1 billion in assets, according to NERA Economic Consulting.

In almost all cases, the deposits of the failed bank were assumed by another financial institution.

Michael Cosgrove, principal of the Econoclast in Dallas, said bank failures are a lagging indicator, meaning its deterioration and recovery lags those of the broader economy. Indeed, bank failures did not peak until third quarter 2009; by then the worst of the recession was already over and economic recovery was gaining momentum.

Currently, about mid-way through third quarter 2010, banks are still failing at an alarmingly high rate. Cosgrove said the smaller banks have a larger share of their portfolio in real estate compared to big banks. Consequently, the quality of their balance sheets remain poor as the U.S. real estate sector continues to struggle with the aftermath of its crash.

Banks like these will likely fail for the remainder of this year and the next year; indeed, they will continue to fail until the real estate sector stabilizes, said Cosgrove.

In addition to their real estate problems, small banks are struggling with lending revenues; they are constrained by regulators limiting the amount of loans they can make and a dearth of creditworthy borrowers.

Dividing the data by quarter, 21 banks failed in first quarter 2009, 24 in second quarter 2009, 50 in third quarter 2009, 45 in fourth quarter 2009, 41 in first quarter 2010, 45 in second quarter 2010 and 32 so far in third quarter 2010.

Interestingly, bank failures have been inversely correlated with U.S. economic performance and the stock market. In 2008, the stock market plunged 37 percent. In first quarter 2009, it dropped another 14 percent percent. Then, from second quarter 2009 to first quarter 2010, the stock market surged 44 percent.

Similarly, U.S. GDP contracted at an annual rate of 4.9 percent in first quarter 2009, contracted 0.7 percent in second quarter 2009, expanded 1.6 percent in third quarter 2009, then expanded 5.0 percent in fourth quarter 2009 and advanced 3.7 percent in first quarter 2010.

Meanwhile, as illustrated above, the number of bank failures were relatively low from 2008 to the second quarter 2009, but picked up and remained high since the third quarter of 2009.

In the second quarter of 2010, the economy hit a soft patch. The stock market declined 12 percent and GDP growth slowed to 2.4 percent. The number of bank failures is little changed and remains elevated at 45 in this period.

Plane with 96 passengers crashes in NE China: Xinhua

LONDON: A passenger plane with 96 people on board crashed in Yichun City in northeast China's Heilongjiang Province on Tuesday night, Xinhua news agency quoted government and airline company sources as saying.

Xinhua said the plane belonged to Henan Airlines, but gave no further details. Officials in Yichun said the plane crashed at about 1010 p.m. Emergency services were rushing to the scene.

HP could triumph Dell in 3Par battle, analyst says

Hewlett-Packard (HP) is likely to outlast Dell in a protracted bidding war for 3Par Inc. due to its relative size advantage and its presence in the high-end storage market, an analyst with ThinkEquity said adding that Dell could raise its offer for the storage company.

On August 23, HP launched a rival offer to buy Storage Company 3Par Inc., for $24 a share, trumping Dell's offer of $18 a share, a move that will strengthen HP's corporate data-center business. HP's offer has an enterprise value of $1.6 billion, while Dell had earlier agreed to buy 3Par for $1.15 billion.
"HPQ's presence in the high-end Storage market via its Hitachi Data Systems (HDS) relationship could allow it to achieve faster payback than Dell on its investment. This factor alone is likely to make HPQ bid higher," analyst Rajesh Ghai said in a note to clients.

Apart from potential for faster payback, HP may be in a better position to withstand a prolonged bidding war with Dell, given its greater market cap, free cash flow, and cash balance, the analyst noted.
Ghai, however, said he believes Dell remains likely to stay in the race a little longer, if not anything but to make the deal dearer for HP.
"Hence, we do expect a fresh competing bid for 3Par from Dell, in the near future," the analyst said.
Bloomberg reported earlier that Dell is readying a sweetened offer for data-storage provider 3Par.
The offer may be sent in the coming days, Bloomberg reported citing a person, who declined to be identified because the plans haven't been made public.

3Par deal-A revenue booster

Ghai said both HP and Dell are likely to see incremental revenue at 3Par's 60 percent plus gross margins. For its first quarter ended June 30, California-based 3Par reported a gross margin of 64 percent with revenues rising 22 percent to $54.26 million.
The analyst added that the deal could be accretive for either acquirer at current prices, assuming either acquirer retains about $60 million in incremental annual operating expense from 3Par on its books.
"We also point out a HPQ victory may be near-term positive for EMC while negative for HDS. This reverses in the event of a Dell victory," Ghai said.
If HP wins 3Par deal, it is likely to replace HDS over time with 3Par's T-Class as its high-end storage offering, while Dell is likely to do the same with EMC's Clariion mid-range line with 3Par's F-Class.
Both acquirers may be incented by the possibility of replacing their thin reseller margins with Par's 60 percent plus gross margins.

Dell's Issues with the Deal

Unlike for HP, the high-end storage market is a relatively new segment for Dell, and hence, it might take longer for Dell to achieve revenue leverage in this segment than it may be for HPQ.
Competing in this segment is likely to bring Dell in further conflict with its long-time partner EMC Corp.
Dell's relationship with EMC is broader in nature, as their deal covers Data Domain and Celerra NAS besides Clariion, making it more difficult for Dell to break the relationship. The analyst said even if Dell wins 3Par bid, it is likely to persist with EMC, which might complicate replacement of Clariion revenue with 3Par's F-Class in the mid-range in the future.
HPs Big Pocket
On a trailing twelve month basis, HP generated $7.56 billion of free cash flow compared to Dell's $1.95 billion. Meanwhile, HP currently has $14.2 billion in cash on its balance sheet while Dell has $10.9 billion, signaling HP has deeper pockets than Dell, which might enable it to outlast Dell in a prolonged bidding war.
3PAR's shares are currently trading at a premium to HP's offer, which reflects the market's belief that Dell or another acquirer may come in with yet a higher bid, and rumors afloat that EMC or NetApp could jump in the fray.
However, Ghai said he do not expect a competing bid from either NTAP or EMC.
"We do not believe EMC is likely to put down $2 billion to prevent fresh competition in the high-end Storage market. We also believe NTAP is unlikely to enter the fray given its experience fighting a larger competitor in the bidding war for DDUP last year," Ghai said.
"While Dell can certainly come in with another bid, at the end of the day 3Par is worth more to HP than it is to Dell, given HP's existing enterprise hardware and services businesses," Ghai added.
Shares of HP closed Monday's trading at $39.04, while Dell ended Monday's trading at $11.94.
Meanwhile, shares of 3Par were up 3.3 percent at $26.95 in the pre-market trading Tuesday after closing Monday's trading at $26.09.

US home sales dive to 15-year low

WASHINGTON: Sales of previously owned US homes took a record drop in July to their lowest pace in 15 years, suggesting further loss of momentum in the economic recovery.

As the National Association of Realtors issued the report, Chicago Federal Reserve President Charles Evans warned that the risk of a double-dip recession was higher than six months ago although he did not think output would contract, describing the recovery as ongoing but modest.

Existing home sales dropped a record 27.2 percent from June to an annual rate of 3.83 million units, the lowest since May 1995. June's sales pace was revised down to a 5.26 million-unit pace from a previously reported 5.37 million.

Analysts polled by Reuters had expected sales to fall 12 percent to a 4.70 million-unit rate last month.

"This is a worrisome report and while it reflects the volatility caused by the end of the (government home-buyer) tax credits, it also indicates a deterioration in the underlying trend for housing demand," said Michelle Meyer, senior U.S. economist at Bank of America Merrill Lynch in New York.

"For the overall economy, the dangerous link to housing is home prices and this report signifies that home prices should fall considerably faster, which could tip the economy back into a recession. We are, however, not quite there yet but this is a worrisome report."

General Motors in huge share sale

General Motors has paved the way for an initial public offering (IPO), expected to be the second largest, perhaps even the largest, share sale in US history.

GM, 61%-owned by the US government, has officially filed its proposals with the Securities and Exchange Commission.
The move begins the timetable for the IPO, which analysts believe will raise between $12bn (£7.7bn) and $20bn.
It means the US Treasury can begin selling part of the stake it took after a $50bn bailout of the carmaker.

Company executives have said for months they were planning to re-float GM, as the carmaker seeks to repay the rescue funds received from the US and Canadian governments.

"It signals the return to normalcy, to being able to start paying the taxpayer back... Getting the company back to a traditional publicly traded company," said Rebecca Lindland, director of consultancy IHS Automotive.
The 700-page filing of the IPO paperwork with the SEC came nearly a week after GM reported second-quarter profits of $1.6bn, its biggest profit in six years.
The share sale is expected to take place later this year. The largest US IPO so far is Visa's 2008 offering that raised $19.7bn

Unanswered questions
 
GM, the biggest US carmaker, said it would apply for listings on the New York and Toronto stock exchanges, but did not say exactly how many shares it would sell.

"The amount of securities offered will be determined by market conditions and other factors at the time of the offering," GM said in a statement.

"The number of shares to be offered and the price range for the offering have not yet been determined," it added.
Analysts have speculated that the US Treasury will sell about a fifth of the 304 million GM shares it holds, reducing its stake to under 50%.
The IPO would have to bring in $70bn just to pay back all of the GM's stakeholders, but analysts are not expecting anything close to that size.
Demand for GM shares in the financial markets is unclear, and its advisers will now begin the job of pitching the company to potential investors around the world.
News of the IPO also comes a week after GM's chief executive, Edward Whitacre, announced plans to resign.
He will hand over to current board member Dan Akerson, but will stay on as chairman until the end of the year.
Mr Whitacre joined GM in July last year to help restructure the carmaker and prepare its return to full private-sector ownership.
GM has cut more than 65,000 jobs in the US and closed factories in an attempt to cut costs in the last year.
It has also sold its Saab brand and wound down others, though it has retained its European brands, Opel and Vauxhall.
GM has already repaid $8.4bn worth of loans to the US and Canadian governments.

Oriflame workers detained in Iran as operations shut

Iranian authorities have closed the Tehran operations of Oriflame Cosmetics and detained five workers, the Swedish firm has said.

The reasons for the move were disputed, with Tehran alleging fraud and Oriflame saying the authorities disliked it employing women in certain roles.
Last week, Iran's commerce and culture ministries called the company illegal and blocked its local internet site.
Oriflame said the move could be because it employs women as sales consultants.
According to a statement on the company's website on Monday, "business conditions in Iran have deteriorated in recent months".
The statement continued: "The authorities have now closed operations in Tehran. The authorities have also detained three members of staff and two sales consultants without disclosed reasons.
"Oriflame has not at present access to detailed information relating to the background to, or effects of, the current situation."
In Tehran, state radio reported that the company had violated tax regulations and custom law, and operated an illegal marketing scheme.
An an Iranian newspaper, Kayhan, accused the company of supporting opposition members in Iran.
In an interview with the Associated Press news agency, Oriflame's chief financial officer, Gabriel Bennet, rejected the allegations.
"Of course this is not true. We are running a business in Iran like anywhere else in the world, according to good international code of conduct," he said.

Hewlett Packard trumps Dell with $1.6bn bid for 3PAR

Computer maker Hewlett Packard (HP) has launched a $1.6bn (£1bn) bid for data storage firm 3PAR, trumping a $1.2bn offer made by rival Dell last week.

Along with IBM, the two firms are looking into more profitable business areas outside of making computers.
The bids come as part of a glut of merger and acquisitions activity in the technology sector, including last week's $7.8bn bid for McAfee by Intel.
The HP bid pushed Wall Street higher in early trade, before shares lost ground.

On a day of light trading, the main Dow Jones index closed down 0.4% at 10,174 points.

Shares in 3PAR rose almost 45%, while those in HP slipped 2%.

'Good fit'

HP said that, if its offer was accepted, the deal should be closed by the end of the year.

Analysts said the battle between two of the world's three largest computer makers to gain control of 3PAR showed their determination to move into so-called cloud computing - technology that allows access to data servers over the internet.
"One of the growth areas in technology is in the enterprise storage space," Joel Levington at Brookfield Investment Management told Bloomberg.
"3PAR's products fit in well there. It's an easy way to gain product breadth."
He also expressed doubts about whether Dell would be able to match HP's offer.

Woolworths stores remain unused 18 months after closure

More than 300 former Woolworths stores are still empty a year and a half after the chain collapsed.

The Local Data Company, which provides information on the retail sector, says this represents some 40% of the once-national chain.
The company said some experts believed about 150 stores may never be used as shops again.
The biggest group now using the outlets are discount retailers, including Poundland.

It, along with 99p Stores and B&M Bargains, occupy 25% of former premises.

The next biggest takers of ex-Woolworths stores are supermarkets. New owners include Iceland, which has taken more than 60 premises, and Waitrose.
Less common new uses include a health centre and a library, while a few have reopened stocking a similar range of products under similar sounding names, such as Alworths and Wellworths.
The best take-up of old Woolworths has been in Greater London, where 81% have now been reoccupied, followed by those in Yorkshire and the Humber area at 64%.
Last year the number of empty stores was 60% and one analyst said that despite many stores remaining empty, the latest figures provided some encouraging news of the retail climate.
Andrew Garbutt, retail and leisure director at PricewaterhouseCoopers, said: "The Local Data Company's research shows the UK high street is experiencing a gradual recovery, with vacant ex-Woolworths stores being filled gradually."
Woolworths went into administration in 2008 after facing increased competition from supermarkets and online retailers.

Barclays customer accounts hit by computer glitch

Thousands of Barclays customers were unable to access their bank accounts or withdraw money from cash machines on Saturday due to a computer glitch.

The bank's system froze up around 2pm, causing customers to abandon purchases at the tills during one of the busiest shopping times of the week.
The nationwide seizure also hit telephone and online banking services.
Barclays' telephone banking centres were inundated with customer complaints.
A Barclays spokeswoman was unable to elaborate on the cause of the problems.
She told the BBC: "We became aware of the problem - which was resolved quickly - early on Saturday afternoon. We apologise to customers for any inconvenience."
She added it was still not yet clear what had caused the glitch, but said the company was looking into it "as a matter of priority".
Barclays is Europe's sixth-biggest bank by market value. It signed a two-year deal with NCR earlier this month for the management and maintenance of its UK network of ATMs. But Barclays said the issue was not related to NCR.

Bovis Homes invests in new land

Bovis Homes has reported a pre-tax profit of £3.5m in the first six months of 2010, after investing in more land.

Bovis, which made an £8.6m loss in the same period last year, said it added 1,874 consented plots - land with planning permission - to its land bank.
The addition represents about one year of land supply, the company said.
Bovis repeated its intention to resume its dividend as confidence returns to the industry after homebuilders were hit hard during the recession.
"Making investments in land at what we believe to be a low point in the housing market cycle is the right thing to do," David Ritchie, Bovis chief executive, told the BBC.
"We're not suggesting that house prices will rise; we're suggesting there is an opportunity to buy land today at current prices and make strong returns."
But he added: "Clearly activity is a concern and we are aware of that."
The group said it had £79m net cash in hand at the end of June and was "positive" about future expansion and improved profits.