FDIC Data For Q1 2018 Show Both Improvements And Concerns

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Includes: BAC, C, JPM, WFC
by: Richard Suttmeier

Summary

The FDIC Quarterly Banking Profile for the first quarter shows continued growth of total assets in the banking system.

Total real estate loans are on the rise but lag the 2007 level by 5.2% as mortgages, C&D loans and HELOCs lag potential.

The Deposit Insurance Fund is on the rise but so are insured deposits creating a potential squeeze.

Reserves for losses remain 21.7% above pre-crisis levels.

The Federal Deposit Insurance Corporation recently released its Quarterly Banking Profile for the First Quarter of 2018 with little fanfare.

Wall Street and equity fund managers continue to recommend bank stocks due to the pending increases in interest rates pledged by the Federal Reserve.

When analyzing FDIC data, you begin with the four ‘too big to fail’ money center banks as they control 41.4% of the assets in the banking system.

Scorecard For The Bank of America (NYSE:BAC) set its 2018 high of $33.05 on March 12 and set its 2018 low of $28.43 on May 3. The stock is in correction territory 10.8% below the high, but the stock held its 200-day simple moving average of $28.70 on May 29. The weekly chart is negative.

Citigroup (NYSE:C) set its 2018 high of $80.70 on Jan. 29 and set its 2018 low of $65.30 on May 29. The stock is deep into correction territory 17.4% below the high. The stock is well below its 200-day simple moving average of $72.57 with its semiannual value level at $64.72. The weekly chart is negative.

JP Morgan (NYSE:JPM) set its 2018 high of $119.33 on Feb. 27 and set its 2018 low of $103.98 on Feb. 5. The stock is 9.2% below the high. The stock held its 200-day simple moving average of $105.33 on May 29. The weekly chart is negative.

Wells Fargo (NYSE:WFC) set its 2018 high of $66.31 on Jan. 29 and set its 2018 low of $50.26 on April 18. The stock is deep in correction territory 18.2% below the high. The stock is below its 200-day simple moving average of $55.90. The weekly chart is positive with the stock above its 200-week simple moving average or ‘reversion to the mean’ at $53.28.

Overview Of The Banking System According To The FDIC

FDIC chair Martin J. Gruenberg indicated that the banking system continues to recover on higher net operating revenue and the lower effective tax rate. He cautioned however that the economic expansion is now the second largest on record which highlights potential risks down the road.

He continues to warn that many banks have been ‘reaching for yield’ by investing in higher-risk, longer-term assets. This makes it important for banks to manage interest rate risk, liquidity risk and credit risk.

I consider the FDIC Quarterly Banking Profile as the balance sheet of the U.S. economy, and in my opinion, the banking system has not fully-recovered from the “Great Credit Crunch” which began more than ten years ago.

The FDIC Quarterly Banking Profile For The Second Quarter Of 2017

Key Data From The FDIC Courtesy of the Federal Deposit Insurance Corporation

The number of FDIC-insured financial institutions fell to 5,606 in the first quarter, down from 5,670 in the fourth quarter. At the end of 2007, there were 8,533 banks with only 76 on the problem list versus 92 today. The number of employees in the banking system increased slightly to 2.077 million, up from 2.076 million in the fourth quarter. The banking industry had 2.215 million employees at the end of 2007. The number of employees in the banking system is down 6.2% since 2007.

Total Assets rose to $17.53 trillion in the first quarter, up 34.5% since the end of 2007. The four “too big to fail” money center banks, JP Morgan, Bank of America, Wells Fargo and Citigroup still hold 41.4% of all assets, which remains a regulatory headache. Wells Fargo with all its fines and loss of clients lost 2% of its assets as the other three picked up the slack.

TBTF Assets Residential Mortgages (1 to 4 family structures) represent the mortgage loans on the books of our nation’s banks. Production rose to $2.07 trillion in the first quarter, still 7.7% below the pace at the end of 2007. Mortgage lending thus lags potential.

Nonfarm / Nonresidential Real Estate Loans represent lending to construction companies to build office buildings, strip malls, apartment buildings and condos, a major focus for community banks. This category of real estate lending expanded to a record $1.403 trillion in the first quarter, up 44.8% from the end of 2007.

The banking system has been building exposures to Nonfarm Nonresidential real estate loans and faces the risk of defaults as retail stores and malls are shuddered.

Construction & Development Loans represent loans to community developers and homebuilders to finance planned communities. This was the Achilles' Heel for community banks and the reason why more than 500 banks were seized by the FDIC bank failure process since the end of 2007. C&D loans rose to $344.2 billion in the first quarter, up 1.7% from the fourth quarter but are 45.3% below the level at the end of 2007.

This is evidence that market for new homes is well below potential.

Home Equity Loans represent second lien loans to homeowners who borrow against the equity of their homes. Regional banks typically offer HELOCs, but these loans continue to decline quarter over quarter despite the dramatic rise in home prices. HELOC lending declined another 3.1% in the first quarter to $398.4 billion and is down 34.4% since the end of 2007. The Dodd-Frank law makes HELOC lending a paperwork nightmare.

Total Real Estate Loans had a sequential growth rate of just 0.3% in the first quarter to $4.22 trillion, down 5.2% since the end of 2007.

Real estate lending is supposed to be a driver of economic growth but has been disappointing.

Other Real Estate Owned declined by 3.8% in the first quarter to just $8.13 billion as formerly foreclosed properties return to the market. This asset category peaked at $53.2 billion in the third quarter of 2010.

Notional Amount of Derivatives where many trading risks reside rose by a significant 18.7% in the first quarter to a mammoth $206 trillion. This exposure is up by 24% since the end of 2007.

Deposit Insurance Fund represents the dollars available to protect insured deposits. These monies are funded by all FDIC-insured institutions via annual assessments, with the largest banks paying the largest amounts. The first quarter DIF balance is $95.07 billion up from $92.75 billion in the fourth quarter.

Insured Deposits rose to $7.335 trillion in the first quarter and is up 70/9% since the end of 2007 as savers seek the deposit insurance guarantee of $250,000 available at each bank in which a saver has insured deposits.

By the end of September 2020, this fund is mandated to have the fund at 1.35% of insured deposits. The current level is unchanged at 1.30%. If this ratio is not reached by the end of 2018, the largest banks will be assessed to close the gap.

Reserves for Losses slipped slightly to $123.7 billion in the first quarter which is still 21.7% above the level shown at the end of 2007. This is a sign of continued residual stress in the banking system.

Noncurrent Loans fell to $112.5 billion in the first quarter and is now 2.3% above the level at the end of 2007.

Disclosure: I/we 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.