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Bank Asset Quality

Posted by Wendell Brock on Tue, Mar 02, 2010

The Risk Management Association (RMA) just released 2009 Q4 figures showing that the downward slide of bank asset quality is beginning to level off.

The RMA is a nonprofit with 3,000 institutional members whose goal is to implement sound risk principles in the financial sector. Their Risk Analysis Service data report was released in conjunction with Automated Financial Systems, Inc., and is the self-professed only gauge of comprehensive credit risk. The data utilize figures from 17 top-tier banks.

Showing Signs of Recovery

From the press release: "The leveling off of the deterioration of commercial asset quality from the third to fourth quarter is a positive indicator that the economy is showing signs of recovery," said William F. Githens, RMA president and CEO. "However, the business banking sector continues to be a concern and is substantially underperforming the middle market and large corporate lines of business."

But while the rate of decline in asset value for big banks is only beginning to level off, specialty lenders are enjoying quicker successes. AmeriCredit, CapitalSource, Allied Capital Source, and CIT Group all posted 52-week high stock prices (TheStreet).

CIT GROUP

CIT Group, a commercial lender to small and medium-sized businesses, took its first bond to market on February 26 after emerging from a brief, month-long Chapter 11 reorganization in December. The bond, offered at $667.2M, represents a portfolio transition from commercial-paper-backed to equipment leases. Hopefully, this shift will lead the way to longer-term solutions to loan portfolio instability and vulnerability.

CIT's bond is issued through the Federal Reserve's Term Asset-Backed Securities Loan Facility (TALF), also known as "Bailout #2." CIT got in on the Facility just before its rapidly approaching final monthly application deadline of March 4.

It's a start, but CIT needs to secure other, low-cost funding that doesn't come from the government. Their bankruptcy had followed on the heels of nine consecutive losing quarters that totaled over $5B.

Whether CIT Group-and other lenders-will be able to remain solvent after TALF's discontinuation remains to be seen. What we know, though, is that small businesses are counting on the success of CIT and similar lenders.

Word on the Street

A recent CIT report-auspiciously titled "Lessons Learned-A Case for Greater Optimism" -surveyed owners and executives of 220 American small businesses (as defined by annual revenues from $1M to $15M) about the close of 2009 and their views of 2010.

Key findings:

  • For 2009, 33% said their revenue "declined," and 26% said it "declined significantly"
  • 64% said it was harder today to manage their company's cash flow than it was 12 months ago
  • 90% agreed that current stimuli does not help them
  • For 2010, a whopping 53% expected their revenues to "grow," and 8% expected their revenues to "grow significantly"
  • 80% said they're now smarter about running their businesses
  • 70% said the recession made them better leaders

Bankers should look at a systems to stress test their loan portfolios in an effort to better manage the risk. There are systems in the market place that will stratify/custom grade loan portfolios, stress test the portfolio along various key data points (not just interest rate stress), provide the probability of loss a portfolio will incur. These systems offer many other items of information that are essential to managing the loan portfolio and its risk, to both the bankers and the regulators.

Topics: Bailout, Bank Risks, Bank Asset, stress tests, loan portfolio, Noncurrent loans, charge-offs

FDIC Reports Aggregate Quarterly Loss for Banking Industry

Posted by Wendell Brock on Mon, Mar 02, 2009

The FDIC’s most recent Quarterly Banking Profile (QBP) confirms the continuation of problems for the banking industry, as several key metrics showed further deterioration in the fourth quarter. These are some highlights:

•    Quarterly earnings declined, swinging industry profitability to a net loss.
•    Loan loss provisions, net charge-offs, defaults and noncurrent loan balances increased.
•    Aggregate outstanding loans and leases decreased.
•    Total deposits increased.
•    Average net interest margin generally improved for larger institutions, but declined for community banks that fund most of their assets with interest-bearing deposits.

Degradation of earnings performance

For the first time since the fourth quarter of 1990, insured commercial banks and savings institutions reported a net quarterly loss. The aggregate loss, which exceeded $26 million, was fueled by a combination of loan loss provisions, trading losses and asset write-downs. Roughly half of the aggregate loss was driven by results at only four banks. But, 32 percent of all insured institutions reported a net loss. The industry’s quarterly return on assets (ROA) was a negative 0.77 percent, the worst quarterly ROA performance since 1987.  

Full-year 2008 net income was slightly more than $16 billion, vs. $100 billion in the year earlier. The full-year ROA was a meager 0.12 percent. These figures were somewhat inflated due to the accounting entries related to failures and mergers; excluding those impacts, the industry would’ve reported a loss for the year.

Loan loss provisions, charge-offs and defaults


Credit quality continued to be problematic. The industry’s loan loss provisions for the quarter were in excess of $69 billion, or more than half of aggregate net operating revenue. Net loan and lease charge-offs were nearly $38 billion, which is more than double the amount recorded in the year-earlier period. Charge-offs for real estate loans, both construction and development loans and residential mortgages, increased more than $10 billion on a combined basis.

At year-end, the industry was strapped with $230.7 billion in noncurrent loans. This compares to $186.6 billion at the end of the third quarter. The sharp increase does not bode well for a near-term lending or housing recovery, particularly since nearly 70 percent of that increase was related to mortgage loans—residential mortgages, C&I loans, home equity loans and other loans secured by real estate.

Trading losses, asset write-downs, declining equity capital


Trading losses in the fourth quarter were large at $9.2 billion, but down from last year’s level of $11.2 billion. Charges associated with goodwill impairments and factors jumped more than $4 billion from last year, to $15.8 billion.

The disappearance of $39.4 billion in goodwill, along with a reduction in other comprehensive income, led to another consecutive reduction in total equity capital.

Total regulatory capital, however, notched an increase of 2.2 percent. At year-end, 97.6 percent of insured banks matched or beat the highest regulator capital standards.

Restructuring reduces loans outstanding


Net loans and leases outstanding slipped by 1.7 percent. The decline was largely attributable to portfolio restructuring by several large institutions.

Mergers and failures shrink the industry


During the fourth quarter, the number of insured institutions shrank by 79. There were 12 failures in the quarter and 15 new charters. The rest of the decline was related to merger activity and FDIC assistance transactions. For the year, 25 banks failed and 98 institutions were chartered.  

As of December 31, the FDIC’s bad bank list contained 252 insured institutions, representing total assets of $159 billion. 


Topics: FDIC, Banking industry, Bank Mergers, Quarterly Banking Profile, equity capital, charge-offs, Loss, earning performance, mergers

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