Seeking Alpha
Bonds, research analyst, gold, currencies
Profile| Send Message|
( followers)  

FDIC Claims Banking System on the Mend Despite Cloudy Q1 2011 Data

The FDIC touts fewer bank failures and problem banks, but my statistics show more banks in trouble. The FDIC’s list of “Problem Banks” only grew by four to 888, but like the questionable profit numbers mentioned below, slow growth in the number of problem banks is based on the fact that 56 banks were absorbed by merger and 26 banks failed in the first quarter. I would also argue that the FDIC continues to be slow in closing banks overexposed to Commercial Real Estate loans and thus the next wave of bank failures is delayed rather than avoided.

Profits are on the rise for the FDIC-insured financial institutions, but a closer look at the data reveals that this is only due to reduced loan-loss provisions. In fact, net operating income for FDIC institutions was lower year-over-year for only the second time in 27 years. Among the ten largest financial institutions, six reported year-over-year declines in net operating revenue, six reported declines in noninterest income, and eight reported lower net interest income.

The “Too Big to Fail’ banks are even bigger; JP Morgan (NYSE:JPM) leads with $1.87 trillion in assets. Bank of America (NYSE:BAC) is second with $1.69 trillion. Citigroup (NYSE:C) is third with $1.32 trillion. Wells Fargo (NYSE:WFC) is fourth with $1.14 trillion. The top four banks have $6 trillion in assets, which is 45% of the entire pool of assets in the banking system. These banks will be paying higher assessments to the FDIC Deposit Insurance Fund in the months and years ahead.

The housing market remains a drag on the US economy, and the network of community banks are not fit financially to increased lending to homebuilders and to potential home buyers. Community banks remained saddled by legacy commercial real estate loans made between 2003 and 2007, and our major regulators -The US Treasury, the Federal Reserve and the FDIC - ignored their own regulatory guidelines.

Thus we see continued banking and housing woes. This sort of environment caused the 2008 / 2009 recession and I see little improvement. For example, at the end of 2007 there were $164.8 trillion in notional amount of derivatives at FDIC-insured financial institutions. At the end of the Q1 2011, derivatives were significantly higher - at $246.1 trillion, up 49.3%. De-leveraging should have reduced this total.

As I have long predicted, we have a confirmed double-dip for housing, and I believe that ongoing problems in the banking system could combine with housing woes to once again drive the US economy into recession.

The Banking System Remains Over-Leveraged

The charts below track critical FDIC asset and loss data—sequential quarterly, YoY, and Q4 2007-present.

Sequential FDIC Statistics:

Q4 2010

Q1 2011

$ Change

% Change

% YOY

Total assets

13,319,971,000

13,414,655,000

94,684,000

0.70%

0.60%

1 - 4 Family residential mortgages

1,897,610,000

1,833,798,000

-63,812,000

-3.40%

-2.80%

Nonfarm nonresidential

1,070,659,000

1,064,489,000

-6,170,000

-0.60%

-2.50%

Construction and development loans

321,438,000

295,511,000

-25,927,000

-8.10%

-29.30%

Home equity loans

636,903,000

623,994,000

-12,909,000

-2.00%

-5.40%

Totals Loans

3,926,610,000

3,817,792,000

-108,818,000

-2.80%

Insured Deposits

6,302,000,000

6,389,000,000

87,000,000

1.40%

Notional amount of derivatives

232,210,712,000

246,083,864,000

13,873,152,000

6.00%

12.50%

Courtesy FDIC

Total Assets increased by $94.7 billion in the first quarter up 0.7% sequentially and up 0.6% year-over-year.

1-4 Family residential mortgages on the books of the FDIC-Insured banks decreased by 3.4% or $63.8 billion sequentially in the first quarter and down 2.8% year-over-year. This is a sign that banks are either writing down non-performing mortgages or passing them through to Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC).

Nonfarm, nonresidential real estate loans are starting to decline and did so by 0.6% in the first quarter, or by $6.17 billion sequentially in the first quarter and down 2.5% year-over-year.

Construction & Development Loans (C&D) continue to decline this time by 8.1% or $25.9 billion sequentially in the first quarter and down 29.3% year-over-year.

Commercial Real Estate Loans, The sum of Nonfarm nonresidential and Construction and Development Loans still totals $1.36 trillion down from $1.39, but remains the Achilles Heel among community banks.

Home Equity Loans declined 2.0% or $12.9 billion sequentially and down 5.4% year-over-year. This category accelerated once again as the foreclosure mess continues into 2011.

Notional Amount of Derivative Contracts increased $13.87 trillion or 6.0% sequentially and up 12.5% year-over-year. This renewed acceleration is a warning that the banking system and credit markets are back into speculation mode, when de-leveraging should be occurring. Derivatives were a major cause of “The Great Credit Crunch” and their huge numbers keeps the banking system on shaky grounds.

Year-Over-Year FDIC Statistics:

Q4 2010

Q1 2011

$ Change

% Change

% YOY

Total assets

13,319,971,000

13,414,655,000

94,684,000

0.70%

0.60%

Reserve for Losses

231,154,000.00

218,158,000.00

-12,996,000

-5.60%

-17.10%

30-89 Day Past Due

118,390,000.00

110,513,000.00

-7,877,000

-6.70%

-23.50%

Noncurrent Loans

358,719,000.00

341,697,000.00

-17,022,000

-4.70%

-16.60%

Other real estate owned

52,676,000.00

52,376,000.00

-300,000

-0.60%

13.10%

Courtesy FDIC

Reserve for Losses – Declined another $13.0 billion in the first quarter sequentially and is now down 17.1% year-over-year. The decline of reserves is the major factor for increased net income. As you can see the Reserves for Losses falls well shy of covering the Noncurrent Loans.

30-89 Day Past Due – Declined by $7.9 billion in the first quarter sequentially. Being down 23.5% year-over-year is a sign that banks with capital constraints are holding off taking action against borrowers in arrears.

Noncurrent Loans – The decline of $17.0 billion in the first quarter is a symptom of “extend and pretend” where lenders are keeping borrowers current even though they are not. Noncurrent loans are down 16.6% year-over-year.

Other Real Estate Owned (OREO) – Declined $300,000 in the first quarter as banks start to sell more OREO than they take in. Even so, OREO increased 13.1% year-over-year. At $52.4 billion, OREO remains a burden for the banking system.

Courtesy FDIC

FDIC Asset Picture Since the Start of the Crisis:

Q4 2007

Q1 2011

$ Change

% Change

Number of Banks

8,534

7,574

-960

-11.20%

Total assets

13,038,765,000

13,414,655,000

375,890,000

2.90%

1 - 4 Family residential mortgages

2,245,323,000

1,833,798,000

-411,525,000

-18.30%

Nonfarm nonresidential

968,401,000

1,064,489,000

96,088,000

9.90%

Construction and development

628,918,000

295,511,000

-333,407,000

-53.00%

Home equity loans

607,396,000

623,994,000

16,598,000

2.70%

Total real estate loans

4,450,038,000

3,817,792,000

-632,246,000

-14.20%

Other real estate owned

12,138,000

52,376,000

40,238,000

331.50%

Notional amount of derivatives

164,780,773,000

246,083,864,000

81,303,091,000

49.30%

Deposit Insurance Fund

52,413,000

(1,000,000)

-53,413,000

-101.90%

Insured Deposits

4,292,221,000

6,389,000,000

2,096,779,000

48.90%

Q4 2008

Q1 2011

$ Change

% Change

Total assets

13,843,297,000

13,414,655,000

-428,642,000

-3.10%

Courtesy FDIC

The Number of Banks or FDIC-Insured Financial Institutions declined by 980 or 11.2% to 7,574 from 8,534 since “The Great Credit Crunch” began at the end of 2007. This total includes 366 bank failures through May 2011.

Total Assets are higher by $375.9 billion since 2007. The peak in total assets was $13.84 trillion at the end of 2008 and is down $428.64 billion, or 3.1% since then.

1-4 Family residential mortgages have declined $411.5 billion or 18.3% since 2007. These are mortgages that are on the books of the banks, not in the securitization pipeline.

Nonfarm, nonresidential real estate loans are up $96.1 billion or 9.9% since 2007, but this category has started to deteriorate in Q2, Q3 and Q4 in 2010 and in Q1 in 2011.

Construction & Development Loans (C&D) are down $333.4 billion since the end of 2007, or 53.0%. Back between the end of 1988 and the end of 1992 this category of Commercial Real Estate Loans declined 54.7%, and “The Great Credit Crunch” we are in today will likely exceed that percentage.

Home Equity Loans are $16.6 billion higher since the end of 2007 because homeowners continued to tap their lines of credit to pay for necessities as the housing market imploded. This loan category is now starting to decline--down in Q2, Q3 and Q4 of 2010 and Q1 of 2011. The write down of these loans should accelerate during the period of increased short sales and foreclosures that are likely in the quarters ahead.

Other Real Estate Owned (OREO) is up $40.2 billion since the end of 2007. OREO now totals $52.4 billion up 331.5% since “The Great Credit Crunch” began. When a bank forecloses on a property they own it, and the costs associated with it such as; property taxes, building maintenance, and HOA fees. This is a much bigger problem than in 1988 thru 1992 as OREO grew by only 15.1% during that period.

Notional Amount of Derivative Contracts have increased $81.3 trillion since the end of 2007 to $246.1 trillion. This is a huge read flag and will be the source of additional time bombs for the global economy. De-leveraging and financial reform is supposed to provide more transparency, but I have not seen any sense that derivatives are under increased scrutiny.

Insured Deposits have increased $2.1 trillion or 48.9% since the end of 2007 as money flows into the banking system on the back of the raise in deposit insurance to $250,000 per bank per depositor. This will put increasing stress on the Deposit Insurance Fund (DIF).

Bank Failures and the Deposit Insurance Fund (DIF)

The Deposit Insurance Fund has been in arrears since June 2009, and has been below 1.15% on insured deposits since June 2008.

click to enlarge


Courtesy FDIC

Replenishing the Deposit Insurance Fund will be no easy task:

Under Dodd-Frank the DIF fund reserve ratio must reach 1.35% by September 30, 2020. The FDIC says that they will have a proposal to achieve this ratio later this year on institutions with assets of less than $10 billion. The larger FDIC-insured financial institutions will have a larger stake in rebuilding the fund, most likely based upon total assets.

Insured deposits have increased 48.9% since the end of 2007 to $6.389 trillion. With this rate of growth the Deposit Insurance Fund would have to be huge by the end of September 2020. If the FDIC had to insure $10 trillion the DIF would have to be $135 billion, which would surely tax the banks with more than $10 billion in assets.

Banking Indices

The America’s Community Bankers Index (ABAQ) (152.26 at the June 10th close) has a negative weekly chart profile defined by declining momentum and trading below its 5-week modified moving average at 158.24. ABAQ peaked in December 2006, and is down 5.9% year to date and is down 9.0% from its January 18th high at 167.28, which was shy of my annual risky level at 169.92. I do show any nearby value levels so publicly traded community banks remain vulnerable.

Chart Courtesy of Thomson / Reuters

The Regional Bankers Index (BKX) ($46.73 at the June 10th close) has a negative but oversold weekly chart profile. BKX is below its five-week modified moving average at $49.40. The BKX peaked in February 2007 and that long term bear market trend continues. The BKX is down 10.5% year to date and down 16.2% from its February 15th high at $55.88. I do not show any nearby value levels and this month’s risky level is $54.36.

Chart Courtesy of Thomson / Reuters

Housing Indices

The Housing Index (HGX) ($104.04 at the June 10th close) has a negative weekly chart profile defined by declining momentum and weekly close below its five-week modified moving average at $109.92. HGX peaked in July 2005 and this long term down trend continues. HGX has not been able to trend above its 200-week simple moving average at $110.10 and has been tracking this trend lower. HGX is down 3.7% year to date and is down 13.9% from its February 18th high at $120.81. I do not show any nearby value levels and this month’s risky level is $121.23.


Chart Courtesy of Thomson / Reuters

The National Association of Home Builders Housing Market Index - The National Association of Home Builders Housing Market Index was unchanged at a depressed level of 16 in May. The index has thus not budged much at all over the past six months because of: distressed home sales, lack of Construction & Development financing from community banks, inaccurate home appraisals, and the potential reduction of government support for the overall housing market. Many builders cited the high gasoline prices as a detriment to consumer anxiety with regard to buying a home. It appears that potential buyers of a new home continue to have difficulty in selling their existing home. In addition 73% of potential new home buyers say that it’s difficult to get financing.

The S&P / Case-Shiller Home Price Indices – The S&P Case-Shiller Home Price Index fell for the eighth consecutive month. According to the S&P / Case-Shiller Home Price Indices, home prices fell 4.2% in the first quarter of 2011 after falling 3.6% in the fourth quarter of 2010. At 138.16 the 20-City Composite fell to a new low for the move below the April 2009 low of 139.26. I predicted a double-dip in home prices, and there’s risk of an additional decline of 27.6% to take the 20-City measure back to a reading of 100, where it began in the year 2000.

The Federal Housing Finance Agency (FHFA) reported that their Housing Price Index fell 2.5% in the first quarter of 2011 the largest quarterly decline since the 4th quarter of 2008. Seasonally adjusted, the price decline is 5.5% year over year.

Zooming in, the FHFA House Price Index peaked in April 2007, with home prices down 19.8% since then. This index is based upon purchase-only mortgages issued by Fannie Mae and Freddie Mac. The FHFA also reported that Single-Family Mortgage Delinquencies have slowed but remain near record high percentages.

Source: Banking and Housing Woes Continue