Community and Regional Banks Lead, But Should Not

Includes: IAT, KRE, RKH
by: Richard Suttmeier
Continued problems in the banking system do not justify gains in community and regional banks. The number of FDIC Problem Banks will continue to rise, as will bank failures, which will drain the FDIC Deposit Insurance Fund.
The America’s Community Bankers’ Index [ABAQ] is up 9.8% year to date, but this group of more than 500 smaller banks will be the source of some of the 150 to 200 banks that will fail in 2010. Predicting the winners and losers is not easy, and the ValuEngine List of Problem Banks can help you handicap, which to buy, sell or avoid. ABAQ does not deserve to be at a 52-week high. Note the extreme overbought condition on the daily chart.
Chart Courtesy of Thomson / Reuters
The Regional Bankers Index [BKX] is up a whopping 17.2% year to date, which is not justified by the growing numbers of toxic assets and notional amounts of derivative contracts on the books of our nations largest banks. The BKX is also at a 52-week high with an extreme overbought condition.
Chart Courtesy of Thomson / Reuters
The Number of FDIC-Insured “Problem” Banks Jumped 27% to 702 in the Fourth Quarter of 2009
In 2008 there were just 25 bank failures. In 2009 there were another 140. So far in 2010 through March 5th there have been 26 bank failures bringing the total to 191 since the end of 2007.
The FDIC Deposit Insurance Fund ended 2009 in arrears by $20.9 billion, the second quarter deficit in a row. The last time the fund was negative was in 1992. With the 26 bank failures so far in 2010, my estimate is that the fund deficit is now $25.6 billion. When you consider the $46 billion in prepaid insurance fees for 2010 through 2012 the fund is in the black by $20.5, which in my judgment is not enough to get the FDIC through 2010.
The FDIC did not add the $46 billion directly into the fund and will recognize the prepayments into the fund’s equity balance over the next three years as each year’s assessment is recorded.
The FDIC expects bank closures to increase in 2010, but they reiterate that all insured deposits are safe. Insured Deposits ended 2009 at $5.4 trillion up 13.5% for the year or $641 billion. The increase is attributed to the increase to $250,000 per account for the FDIC guarantee. This is scheduled to return to $100,000 at the end of 2013, but I predict that the new ceiling will be made permanent. At the end of 2007 Insured Deposits were $4.3 trillion, so the increase has been $1.1 trillion or 25.6% during “The Great Credit Crunch”.
Meanwhile, the Deposit Insurance Fund declined from $52.4 billion at the end of 2007 to minus $20.9 billion at the end of 2009, a decline of 140%. Here’s the problem: The DIF fell below its 1.15% of Insured Deposits in June of 2008 and under current law must be funded back to that ratio by the end of June 2013, which seems next to impossible without tapping the $500 billion temporary line of credit with the US Treasury. At today’s level of deposits the fund would have to be about $62 billion. Assuming the growth of the past two years, the fund may have to be $84 billion.
In my opinion the remaining money in the TARP should be deposited in the DIF to ease the stress in the banking system.
Disclosure: No Positions