New Bank Stress Test Shows More Than 25% of US Community Banks Undercapitalized
13 July 2011
The Invictus Group LLC, an independent financial risk management firm, announced today that it has posted online the results of its ground-breaking stress test of all banks and lending institutions in the U.S., Puerto Rico and the Virgin Islands. More than 25% of all U.S. banks fail the minimum risk-based 8% Tier 1 capital requirement under the Invictus two year stress test. The stress test report also indicates that as many as one-fifth of banks in at least 66% of states are projected to be undercapitalized on a post stress test basis. Arizona, Florida and Maryland have the highest percentage of banks at risk with over 50%. Approximately one third of all lending assets reside in banks that are undercapitalized.
In consultation with regulators and others, we at Invictus have been fine-tuning our unique approach to bank stress testing since before the recent recession set in,” said Kamal Mustafa, CEO and one of the founding partners of Invictus. “In back testing, our model accurately predicted every bank that failed in the U.S. since September 2008 in which the institution did not receive a capital injection. We believe our Company has established a new, higher standard of stress testing of Tier 1 capital that is far more sensitive and useful than the historical regulatory capital assessments now in wide use.”
“Banks are at the fulcrum of business activity, and this is particularly true of community banks serving local businesses, which finance commercial and residential real estate and aid in job creation,” said Mr. Mustafa. “Their financial well being is important to their communities. The Invictus Capital Assessment Model (ICAM™), in addition to measuring capital adequacy, provides important oversight of the national disparity of economic stresses and strains.”
Data available on the Invictus site show that after the application of a two year stress test:
• 1,983 or 26% of the 7,695 banks in the country will be undercapitalized.
• 20% or more of the banks in approximately two-thirds of the states will be undercapitalized.
• Arizona has the largest percentage of undercapitalized banks (53%), and Illinois has the largest number of banks (158) that will be undercapitalized.
• Illinois has the largest amount of assets (approximately $100 billion) residing on balance sheets of banks that will be undercapitalized.
“Invictus has taken stress testing to a new level, and what our model indicates, where the historical measures do not, is that far too many banks are not yet out of the woods. Serious challenges remain, especially given current high unemployment and the weak economy,” Mr. Mustafa added. “We are encouraged by the support we are receiving from regulators and bank officials with whom we’ve shared our data, and who are providing us with platforms to address industry groups throughout the country as to our methodology and insights.”
Analysis: Banks in Arizona need cash
by Russ Wiles / The Arizona Republic Jul. 13, 2011
Continuing financial problems could lead to more failures of Arizona-based banks and hasten further industry consolidation, according to a new analysis. "Community banks are still facing enormous pressure," said Kamal Mustafa, chairman of Invictus Consulting Group, a New York-based bank-research firm that conducted the study.
The specter of rising interest rates, whether from a federal debt default in early August or from other reasons down the road, could trigger new problems for small banks.
"When interest rates increase, a lot of customers will face a doubling of their interest costs, leading to an increase in the number of defaults," said Mustafa, who indicated he feels higher rates are inevitable.
Among states, Arizona had the highest percentage of undercapitalized local banks at the end of the first quarter, the most recent period for which data are available, after applying a proprietary stress test developed by Invictus.
Specifically, 19 of the 36 banks wouldn't have enough capital to cover 8 percent of their primary or "Tier 1" loans.
Since the analysis was run, Summit Bank of Prescott last week became the 14th Arizona bank to fail since 2008.
Even so, Arizona banks have made progress. Combined, they earned a small profit from January through March after 12 straight money-losing quarters that resulted in nearly $1 billion in losses.
Invictus conducts stress tests on banks using financial statements and other research. It estimates that Arizona's banks would need to raise $140 million to get the entire group above that 8 percent capital level. The firm's focus is on spotting banks with problem loans that haven't surfaced yet, based on the types of loans still on the books and other factors.
For Arizona, the research indicates that residential real-estate problems have largely moved through the pipeline (at least from the perspective of local banks) but that commercial loans still pose risks. Arizona banks remain heavily exposed to commercial properties that are owned-occupied and those held by investors, Mustafa said.
Other states show different patterns. For example, Nevada banks, which he said are facing a "nightmare," are grappling more with problems from credit-card and other consumer loans tied to high unemployment.
The analysis of banks in Arizona excludes Chase, Wells Fargo, Bank of America and most other big banks that operate here but are headquartered elsewhere. Invictus doesn't publicize details about individual banks.
Regardless of bank size, depositors generally are protected by federal insurance at least up to $250,000 per institution.
One lesson from the research shows the critical role played by capital in helping banks absorb losses and stay afloat. Unfortunately, many Arizona banks are finding it difficult to raise new capital from investors these days.
Despite an $8.8 billion loss just reported by BofA, big banks generally recover much better than their smaller counterparts because they have more diversified operations, lower cost structures and greater ability to raise capital, Mustafa said.
If more weak Arizona banks failed, he said, it would be better for the state if their operations were acquired by healthier Arizona banks as opposed to those based elsewhere. Local institutions, he said, are more likely to recirculate deposits into new loans to benefit the state's economy, rather than redirecting them to other states.
Bank stress high in Ariz.
Arizona has the highest concentration of capital-starved local banks among states, says Invictus Consulting Group. The firm estimates the percentage of banks in each state that would have capital equal to less than 8 percent of their loan assets if a proprietary stress test were applied. The national average of undercapitalized banks is 26 percent.
Rank1 State Arizona Pct. of undercapitalized banks 53%
Rank 2 State Florida Pct. of undercapitalized banks 52%
Rank 3 State Maryland Pct. of undercapitalized banks 51%
Rank 4 State Washington, D.C. Pct. of undercapitalized banks 50%
Rank 5 State South Carolina Pct. of undercapitalized banks 49%
Source: Invictus Consulting Group |
