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State of the Banking Industry
Bad does not even begin to describe it. The Federal Deposit Insurance Corporation (FDIC) issued its quarterly report for the banking industry late last week and it was not a pretty picture. Bank earnings were off a whopping 46% as banks continued to be hit by losses from real estate related problems and worsening credit conditions.. The industry as a whole took over $37 billion in loan loss reserve increases in the quarter. This was over 24% of the industry's operating earnings, compared to just 6% in the same quarter last year. Slightly over half of all FDIC insured financial institutions reported lower earnings for the quarter. For larger banks, those with assets over $10 billion, the percentages were even worse with about 66% of all major banks reporting lower earnings. Four of the largest institutions accounted for over half of the industry earnings decline. They were not named but it is not to hard to figure this includes such stalwarts as Citigroup, Bank of America and Wachovia. The poor operating performance of the industry led to the lowest average return on assets since the fourth quarter of 1991.
Net interest margins at banks fell in the barter as well. 70% of banks had net interest margins lower than the fourth quarter of 2007 and 61% were lower than a year ago. Larger institutions had a slightly better time of it as their funding costs shifted much faster in response to moves by the Fed. Net margins at community banks, which is defined as those with les than $1 billion in assets, reported the lowest net interest margin since 1988! Smaller banks tend to use retail deposits as their core funding source and they reprice much slower than the fed funds borrowings of larger financial intuitions.
Loan quality was simply awful for the banking industry in the first quarter. Total loan charge offs totaled $19.6 billion, an increase of 139%. Charge offs increased in every single loan category. It comes as no surprise that it was real estate and construction lending the showed the highest growth in loan charge offs. The rate that these loans turned bad was surprising however. Home equity lines of credit charge offs increased 614%. Second mortgage charge offs were up over 1000%. First mortgage loans being written off were up 542%. The real winner (loser),however, was construction loans where charge offs rose 1508%. It does not look to get better in the near future as loans over 90 days past due but not yet charged off surged as well. Overall noncurrent loans rose by $26 billion with over 90% of the rise attributed to real estate related loans. 1.75% of all loans were not current the highest level for the industry since 1994.
In spite of the increase in loan loss reserves, the coverage ratio at US banks fell in the quarter. Bad loans increased quicker than banks could reserve against them causing coverage ratios to fall to just $.89 on the dollar of non current loans. This is the lowest ratio in 15 years.
Simply put, it was a disastrous quarter. As mentioned, over half of all banks had lower earnings. 48% cut their dividends and as an industry banks paid out $12 billion less in dividends in the first three months of the year compared to 2007.Over 600 banks paid no dividend at all. Retained earnings fell over 40% as well. All capital ratios showed at least a slight decline. Overall, total equity for all banks fell by better than $12 billion despite several massive capital infusions for larger institutions. 24 banks were added to the problem list, the sixth quarter in a row that the ranks of banks considered troubled by the FDIC has risen. Two banks failed in the quarter but many more expected by the end of the year.
With the foreclosure rate continuing to increase nationally, the next few quarters for the banking industry do not figure to be any better. In addition credit card and auto loans are falling into the noncurrent category at an alarming rate. Loan growth and demand remains slow and it is going to be difficult for banks to earn their way to health until economic conditions improve.
Te full report is available here: http://www4.fdic.gov/qbp/2008mar/qbp.pdf
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