During the last several weeks there has been some cautiously encouraging news that the recession is weakening and that recovery is around the corner.
While it is certainly important to give positive news attention, there are a couple of economic events that still threaten the fragile gains that have been made this year.
The one I am most concerned with related to banking and troubled banks. Yesterday August 27, 2009, The FDIC released its quarterly report for the quarter ending June 30, 2009. Overall the report painted a picture of an industry still struggling, with predictions of many more banks to fail this year.
Past due loans
The report indicates that the value of loans in “non-accrual” status, meaning loans that are over 90 days past due rose for the 13th consecutive quarter. Non-current loans rose in nearly all loan categories. There was some good news related to troubled loans. Loans that have been restructured showed a marked decline in their past due status.
One in four banks posted losses
The report indicated that 64.4% of insured banks reported lower earnings with nearly 29% reporting losses for the quarter. Several factors contributed to these losses, but the largest single reason was the write off of bad loans. The annualized charge off rate reached 2.55% which set an all time record.
The FDIC estimates that 5% of all loans on the books of insured banks may eventually become non-performing, so there may be a number of additional quarters of bad debt write-off and losses.
Number of “Watch List” banks rose
In November of 2008, the number of banks on the FDIC watch list was about 150, at the end of the first quarter the number had risen to 305. As of June 30th, number of problem banks on the watch list increased to 416. There are approximately 8,000 insured banks.
Amount of non-performing loans rose significantly.
Banking is a highly leveraged industry. According to Sageworks, Inc. data the average return on assets (ROA) for all private
Not all the news on the FDIC’s quarterly report was bad. Good news items included:
Non-interest income rose 10.6% year over year.
This is the income banks generate from fees such as overdraft fees, wire transfer fees, checking account fees etc. For the most part this income had little or no risk associated with it.
Net interest margins improve
Net interest margin (NIM) is the holy grail of banking. It is the spread between cost of funds and loan income. During the boom days of just a few years ago, some banks took tremendous risk for very little NIM. The quarterly report showing higher NIM reflects loan pricing that more accurately reflects market risk for loans.
Banks added capital
Banks are required to maintain a certain amount of capital in a variety of classes. During the quarter insured banks raised capital (equity) by 2.4%. Capital helps insure banks can adequately meet their depositor demands as well as help protect when losses are being recorded.
The FDIC second quarter report is a mixed bag. With non-performing loans increasing, I predict the third quarter will be much the same.
Small businesses must have access to capital and I don’t believe banks are going to be ready to lend again until they have healed their institutions from the damage of the recent past and existing bad loans.