Bank Losses Are Not as Bad as We Feared

The FDIC now has the scoop on the banking industry's third quarter results. They aren't as bad as I had feared. Not that they are good, but it's not catastrophic. Some key points:

• The industry earned money third quarter, though a huge amount less than in the third quarter of 2007. Still, 76 percent of all banks were profitable.

• Net interest margin increased, providing a little cushion against the bad news.

• Capital ratios increased at about half the banks.

The critical issue is not the past, but the present and the future. Third quarter loan delinquency rates were up in all categories, and the fourth quarter, with very weak GDP, will certainly prove even worse for loan quality. The bankers with decent financials are worrying that they, too, will be caught up in the credit difficulties. Good news: write offs of mortgage-backed securities have probably been taken, so won't add on any further problems.

The credit crunch outlook: I think that the government's capital infusion will help end the credit crunch, bringing credit down to the tight end of the normal range. However, I'm not real confident about this forecast, because of the bank examiner behavior I wrote about here.

Comments

[Kunst:]

The things that really make investing profitable are the "facts" everyone knows that turn out not to be correct. Others say all the banks are bankrupt, their equity wiped out by the decline of leveraged assets. If banks are healthier than we have been assuming -- even if they still have problems -- the economic situation six months from now could be a lot sunnier than today.

Jan 03 02:20 AM