Bank Lending Still Remains Weak: No Green Shoots In The Banking Data

Includes: IYF, PFI, VFH, XLF
by: John M. Mason

A week ago, I wrote that bank profits are up but the quality of bank earnings are down. The major reason given for bank profits being up is that allocations to loan losses are down and fee income is up. Commercial bank profits are still being squeezed by a very low net interest margin spread and a large number of loans that remain delinquent.

Even though interest rate margins are low, the commercial banks are still being hurt by the fact that they are not lending to any substantial degree. Especially, commercial banks that are smaller than the largest 25 banks in the country are not lending.

According to the latest Federal Reserve statistics (H.8 release), over the past 5-week period, commercial bank lending to business hardly rose. Business loans, other than those granted by the largest 25 banks were basically flat.

Over the past 13-week period business loans rose by $18.6 billion, but almost 90 percent of the loans came from the largest twenty-five commercial banks.

Are these loans helping the economic recovery along? That is perhaps questionable. It seems as if a lot of this lending is going to corporations that don't need the money or to hedge funds and others that are buying up a large part of the housing stock. Many loans like these latter loans are showing up as business loans on the banks' balance sheets and not real estate loans.

In other words, you have got a little more than about 6,000 FDIC commercial banks increasing the business lending in the United States by just over $5.0 billion over the past 13-week period. This averages out to a little bit more than a $800,000 increase in business loans per bank for all the rest of the banks in the banking system.

In terms of real estate loans, over the past 13-week period, loans have decreased at both the largest 25 banks in the country and all other domestically chartered banks. Commercial real estate loans have picked up, but residential and home equity loans have both declined.

Lending for economic growth is just not picking up.

The total assets in the banking system have increased over the past 13 weeks by about $242 billion, but the whole increase seems to be centered in the holding of cash assets. Cash assets in commercial banks rose by slightly more than $250 billion.

This is not surprising given the fact that the Federal Reserve is still pumping lots of excess reserves into the banking system. (See my recent post on Federal Reserve actions.)

The interesting thing here is that the total assets held by the smallest 6,000 commercial banks in the banking system actually declined, as did the cash holdings of these banks.

But also interesting is the fact that the cash assets of foreign-related banks rose the most during this time period. Cash assets at foreign-related banks increased by over $180 billion during this 13-week period. At the same time, the Net Deposits Due to Related Foreign Offices at these institutions rose by about $175 billion. Thus, it would appear that a lot of the funds being pumped into commercial banks in the United States are going offshore.

Note that during the financial crisis in Europe over the past two years or so, cash was built up at these foreign-related financial institutions along with these funds going to "related foreign offices." At that time, the funds were going to help commercial banks in Europe meeting market demands for liquidity.

Right now I don't have a grip on what accounts for this current flow, but it is something to keep an eye on. On May 29, 2013 these balances almost reached $400 billion a new weekly high for this line item. Something seems to be going on.

And the Federal Reserve seems to be underwriting it.

Back to the domestically chartered banks again.

There was some crowing connected with the release last week of the first quarter FDIC statistics that the smaller banks were coming out of the banking crisis. After all, only four commercial banks failed in the first quarter of 2013 and the number of banks on the FDIC's list of problem banks fell from 651 on December 31, 2012 to 612 on March 31, 2013. However, there were 64 fewer banks in the banking system on this latter date than existed at the end of last year.

So far, twelve commercial banks have failed in the second quarter this year.

Furthermore, the assets in the banking system continue to be more concentrated in the larger commercial banks. On May 29, 2013, the largest 25 domestically chartered commercial banks in the banking system held almost 56 percent of all the banking assets. Foreign-related financial institutions held another 16 percent of the banking assets. That means a little more than 6,000 commercial banks in the banking system held approximated 28 percent, just about a quarter, of all banking assets in the United States.

Commercial banks with total assets of less than $1.0 billion account for less than one percent of all the assets in the banking system. This is a total of 1,915 commercial banks, or a little less than one-third of the commercial banks that exist in the United States. That is, about a third of the banks in the banking system hold less than one percent of the total assets of the banking system.

Analysts keep saying that things are starting to look better for the banking system and the economy. Yes, the economy is growing… about 2.0 percent year-over-year… and commercial banks are lending again, but it seems to me that a lot of these analysts are pushing whatever "good news" there is very hard in order to convince themselves that we can buy a lot more equities.

The economy is getting better, but I believe that there still are substantial dislocations of resources in the economy and that these dislocations need to be worked out before the economy can really become robust once again.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.