Where's the bottom?
The people running Sovereign Bancorp already had their hands full at the start of the year, trying to reshape the banking company after a nasty power struggle forced the departure of its former chief executive, Jay Sidhu.
Then trouble in credit markets caused fits for the entire banking industry this summer, and the damage was there for all to see in dismal third-quarter financial reports published last week. Sovereign, in particular, looked like a bank trying to remodel the patio in the middle of a hailstorm.
The only scorecard that interests investors is predictably ugly. Sovereign shares, which hit a new 52-week low in the middle of trading yesterday, have fallen nearly 43 percent so far this year. The stock that traded at $24.10 the day Sidhu resigned one year ago finished at $14.57 yesterday.
Sovereign is based in Pennsylvania but operates with a big banking footprint across New England. The man reshaping Sovereign, new chief executive Joe Campanelli, was promoted into that job last year from his post as the bank's top New England executive.
Campanelli gets good marks for his efforts to simplify Sovereign's financial reports and make the company's business more transparent to stockholders. He also has shrunk Sovereign's business, trying to reduce assets on its balance sheet by as much as $10 billion and cutting overhead expenses at the same time.
"The heavy lifting pieces are behind us," says Campanelli. "We've restructured the balance sheet, recognizing the value of assets we wanted to clean up."
Translation: Sovereign bit the bullet and unloaded some of its least attractive assets. Something called correspondent home-equity loans, junky stuff written by other people far away and bought by Sovereign, topped the list.
Sovereign finally unloaded $3.3 billion of its correspondent home-equity loans earlier this year, but hundreds of millions of dollars in charges were needed. Sovereign kept some of the loans it couldn't sell, amounting to $415 million on Sept. 30, which have required more financial reserves.
Sovereign also sold another $1.5 billion of less attractive mortgages and bit the bullet again. As much as that hurt, it could have been worse. "If we hadn't sold them when we did, it probably would have cost us another $1 billion," says Campanelli.
That doesn't mean all of Sovereign's problems are behind the company. Banks suffering through grim years have a history of posting bad news in the final quarter.
"The guys that have had rough years, whose managers are not going to make their bonuses, tend to throw in the kitchen sink in the fourth quarter," says analyst Gerard Cassidy of RBC Capital Markets. That only improves prospects for a rebound in the year ahead.
Meanwhile, Campanelli has to think about his largest stockholder, Spanish giant Banco Santander Central Hispano, which owns about 25 percent of Sovereign. Santander bought its stake for $26 per share last year, nearly double the current value. Will Santander stick it out or push Sovereign into a sale?
"I can't speak for them, but I believe we all recognize the stock price is not indicative of underlying value," says Campanelli. "The best way to show it is with earnings. We do recognize that it's time to put out."
Sovereign faced up to its problems early and may recover faster. Whether that secures the bank's independence or sets it up for a sale remains to be seen.
BOSTON CAPITAL BLOG Steven Syre is a Globe columnist. Read his daily blog at boston.com/business. He can be reached at syre@globe.com.
