Property Pain Past, Present And Future For U.S. Banks
Paul Maidment, 05.29.08, 6:21 PM ET
forbes.com
When the chairman of the Federal Deposit Insurance Company says, "Its the kind of thing that gives regulators heartburn", it is time for investors, too, to reach for the antacids.
The "kind of thing" that the FDIC's Sheila C. Bair was referring to was the continuing erosion of commercial banks and savings institutions' coverage ratio -- their loss reserves as a percentage of non-performing loans, and an important benchmark within the industry of a bank's health.
According to the FDIC latest Quarterly Banking Report, released Thursday, loan loss reserves increased by $18.5 billion or 18.1% in the first quarter of this year, their largest quarterly increase in more than two decades. But non-current (i.e. 90 days or more past due) loans increased by an even larger percentage -- 24% or $26 billion to $136 billion. The coverage ratio fell from 93 cents of reserves for every $1 of non-current loans to 89 cents per $1.
That is its lowest level since the property slump-induced downturn in the early 1990s. "This is a worrisome trend." says Bair, whose agency oversees the insured deposits, now totaling $150.4 billion, at banks and savings institutions.
No surprises about the financial institutions that most concern her: "The banks and thrifts we're keeping an eye on most are those with high levels of exposure to sub-prime and nontraditional mortgages, with concentrations of construction loans in overbuilt markets, and institutions that get a large share of their revenues from market-related activities, such as from securities trading."
The number of institutions on the FDIC’s Problem List -- banks facing potential failure -- increased from 76 to 90 in the first quarter, or 1.1% of the total (see: " Bad News Banks"). Total assets of those on the list rose from $22.2 billion to $26.3 billion, or 0.2% of industry assets.
This is the sixth consecutive quarter that the number of Problem Listers has increased, from a low of 47 institutions at the end of third quarter 2006. It is, however, a far cry from the days of the savings and loans crisis a decade and a half ago when institutions on the Problem List accounted for, at their peak in 1993, 9.9% of banks and thrifts and 18.4% of industry assets.
That year, 181 banks failed, following 271 and 382 failures in the previous two years. Since then, bank failures have been relatively rare -- none in 2005 and 2006, three in 2007 and two so far this year.
The FDIC doesn't name publicly its Problem Listers and they are likely to be scattered across the U.S. though concentrated in areas hardest hit by the housing slump. Forthcoming data on banks with high concentrations of commercial real estate and construction and development loans may provide more clues.
As well as leading to higher provisions, today's troubled real estate loans have also hit the financial institutions' profits. Commercial banks and savings institutions insured by the FDIC reported net income of $19.3 billion in the first quarter of 2008, a decline of $16.3 billion, or 45.7% from the $35.6 billion that the industry earned in the corresponding quarter a year earlier.
Half of all insured institutions reported lower net income in the first quarter. In addition to the sharp increase in loan-loss provisions, non-interest revenues fell on a year-over-year basis for a second consecutive quarter, declining by $1.7 billion (2.8%). Income from trading was $4.8 billion (67.8%) lower than in first quarter 2007, while sales of loans yielded $1.7 billion in losses, compared to $2.0 billion in gains a year earlier.
Sales of real estate acquired through foreclosure, which produced $3 million in gains a year ago, resulted in losses of $310 million in the first quarter. Other market-related sources of non-interest income, such as investment banking fees and venture capital revenue, were also lower than a year ago.
"While we may be past the worst of the turmoil in financial markets, we're still in the early stages of the traditional credit stress you typically see during an economic downturn," said Bair, somewhat ambiguously. She urged banks to beef up their capital cushions beyond regulatory minimums given the uncertainties about the housing markets and the economy.
Almost 90% of the increase in non-current loans in the first quarter consisted of real estate loans, but non-current levels increased across board, including credit card loans and home equity lines of credit. At the end of the first quarter, 1.7% of the industry's loans and leases were non-current.
Loss provisions totaled $37.1 billion, more than four times the $9.2 billion the industry set aside in the first quarter of 2007. Almost a quarter of the industry's net operating revenue (net interest income plus total non-interest income) went to building up loan-loss reserves. Bair expects banks' loan loss provisions to keep going up for the next few quarters.
Investors also took a $12.2 billion hit from a reduction in dividend payments. Of the 3,776 insured institutions that paid common stock dividends in the first quarter of 2007, 48% paid lower dividends in the first quarter of 2008, with 666 institutions paying no dividend at all. That translated into a aggregate pay-out of $14.0 billion in total dividends in the first quarter, down 46.5% from $26.2 billion a year earlier.
Pain shared is still pain. |
