Banks' Problem Loans Keep Growing

Bloomberg reports on the growing trend in non-performing loans at U.S. banks [emphasis added below]. Non-performing loans are those that are not making payments of interest and/or principal.

This chart (click to enlarge) shows the level of bank loans that are not performing. As usual during a recession, the percentage is going up. The left scale shows the percentage and the right scale indicates the number of banks with serious issues.

The 1990-91 recession also had significant real estate problems and the non-performing loan percentage peaked north of 3% back then. We’re at 2.6% or so now and we are probably headed higher this time around.

Source: Bloomberg / Big Picture

Toxic Loans Topping 5% May Push 150 Banks to Point of No Return (Bloomberg, August 14, 2009, Ari Levy)

More than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival.

The number of banks exceeding the threshold more than doubled in the year through June, according to data compiled by Bloomberg, as real estate and credit-card defaults surged. Almost 300 reported 3 percent or more of their loans were nonperforming, a term for commercial and consumer debt that has stopped collecting interest or will no longer be paid in full.

… “At a 3 percent level, I’d be concerned that there’s some underlying issue, and if they’re at 5 percent, chances are regulators have them classified as being in unsafe and unsound condition,” said Walter Mix, former commissioner of the California Department of Financial Institutions, and now a managing director of consulting firm LECG in Los Angeles. He wasn’t commenting on any specific banks.

…While 5 percent can be “fatal” for home lenders, commercial real estate lenders may be able to withstand higher rates, said William K. Black, former lawyer at the Federal Home Loan Bank of San Francisco and the OTS. Commercial loans carry higher interest rates because they’re riskier, he said.

“At the 5 percent range, you’re probably hurting,” said Black, an associate professor of economics and law at the University of Missouri-Kansas City. “Once it gets around 10 percent, you’re likely toast.”…

One important additional point is how much of a loan loss reserve a given bank has. That is, if non-performing loans are 3% and there is a fully-funded loan loss reserve of 3%, then the problem is manageable. Conversely, if a bank has non-performing loans of 3% and a reserve of only 1.5%, that’s a problem.

Comments

[john s. gordon:]

you mean less worse than expected.
> jack

Aug 16 10:46 AM

[Ray Lopez:]

Nice graphic. I'm surprised the number of banks in trouble is that low--a troubling sign. More to follow.

Aug 16 12:06 PM

[specks:]

I've just finished Friedman/Schwartz and a follow-up by an author who's name escapes me. The banks that collapsed in the 30's did so late in the cycle. Don't forget that the bank "HOLIDAYS" largely took place in '33. And the latter author wrote, "Banking unrest in Pittsburg, Philadelphia, and especially Chicago was directly related to depreciated real estate values in 1931." Also, "The absence of statistics on the default rate on real estate loans, both farm and non-farm, prevents any assessment of the risks involved in real estate lending."
So I keep in mind the 'dustbowl' and the farmers out west losing their crops. Plus we know there was high unemployment and you need a job to pay for a house. 1 in 3 without a job!! Moreover, if you want to keep something secret, don't write about it in the papers!

Aug 17 02:31 PM

[manya05:]

Agree with Ray Lopez, the number of banks in trouble seems low compared to the last recession. Maybe there has been a lot of consolidation since last time around? Or is it that we are just at the beginning of the ramp-up? It would be interested to see the graph not in number of institutions, but as a fraction of all deposits in peril? Funny graph.

Aug 18 02:56 PM

[MTU:]

We're on pace for between 120 and 130 bank failures this year. That is comparable to what we saw in the early S&L crisis years, not featured on the chart.

Aug 18 03:08 PM

[MTU:]

Also, the percentage of closed bank assets that the FDIC is on the hook for has been 34% this year compared to 24% during the S&L days, a telling sign of the amount of leverage today's financial institutions have.

Aug 18 03:09 PM

[Wireless Wiz:]

This is the more pertinent number, however, it must be adjusted for the total size of the banking system, i.e. inflation adjusted, if you will. This bears watching.


On Aug 18 03:09 PM MTU wrote:

> Also, the percentage of closed bank assets that the FDIC is on the
> hook for has been 34% this year compared to 24% during the S&L
> days, a telling sign of the amount of leverage today's financial
> institutions have.

Aug 18 04:01 PM

[Old Rick:]

Everybody probably saw this note on the headlines this morning, but its appropriate to this discussion:

"The performance metrics of commercial real estate (CRE) continue to deteriorate at an unprecedented pace, Fitch says in a preliminary report this morning. Firm notes CRE loans represent more than 125% of large banks' total equity, and more than 200% for smaller banks with assets under $20B."

This seems to validate the article headline. This does not seem to be a "green shoot".

Aug 18 09:09 PM

[TeresaE:]

BoA stopped taking our payments in March.

We had NEVER, in seven years, missed a payment, nor we we late by one minute of one day.

So, sad, bank defaults are rising.

When you force customers into insolvency, could their be any other outcome?

Now add to that the (at least) 5 times since Nov '07 the banks have used the economy to punish paying credit card customers. We had one bank last year take a credit card from 7.99% to 39.99%.

NO late payments, NO missed payments and always paying more than minimum. When we robbed Peter to pay off Judas, they closed our account so that our credit would take a hit.

This is happening all over and "experts" are shocked their default rates are climbing?

Those of us in the real world aren't so shocked.

Aug 18 10:30 PM

[Joe Shareho...:]

150 publicly traded institutions are at 5%. I'd like to know how many publicly traded institutions are out there? We're not talking about community banks whose books we don't have a shot at.

This is big news. I think we're in trouble.

Aug 18 10:52 PM

[Big Al45:]

The ratio of non performing loans is important, but you also have to consider the % of bank assets that tied up in loans, the reserve for loan losses, and the ratio of shareholder equity to total liabilities.

A Texas ratio (non accruing loans + loans 90 days late and still accruing + restructured loans divided by shareholder equity plus loan loss reserve) under 30% is a better indicator of bank health than a NPL ratio under 5%.

However, regardless of whatever metric one uses, the banking system is big trouble - much bigger trouble than the FED and FDIC will acknowledge.

At least a thousand chartered banks will fail by the end of 2011 - although that number doesn't translate directly into the same number of publically traded stocks. The majority of the 1,000 failures will be privately held banks.

In addition, most publically traded "bank stocks" are bank holding companies that own multiple banks. For example, Synovus owns over 30 individual banks - most of which have NPL ratios over 3%.

Aug 18 11:35 PM

[Moon Kil Woong:]

TeresaE My heart goes out to you. Many banks have learned that closing you out while they still have a chance of selling your house and making a buck is preferrable to giving you a chance. You would think that after getting backstops, free government money, and accounting leaniency they would feel compelled to pass some of that good will and compassion on. Not! You are talking to a bank.

The next time government wants to help the property market talk about helping those that actually own property, not those that benefit from forcing you out of your home before prices fall.

Aug 19 05:46 AM