Fresh FDIC Data Show Improvements In The Banking System, But Concerns Remain

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Includes: BAC, BTO, C, FAS, FAZ, FAZZ, FINU, FINZ, FNCL, FXO, IYF, IYG, JHMF, JPM, RWW-OLD, RYF, SEF-OLD, UYG, VFH, WFC, XLF
by: Richard Suttmeier
Summary

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

Total real estate loans continue to rise but lag the 2007 level, as mortgages, C&D loans and HELOCs lag potential.

The Deposit Insurance Fund has risen to within the regulatory guideline versus total insured deposits.

Reserves for Losses remain 20% above banking crisis levels.

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

Wall Street and equity fund managers have been recommending bank stocks on the notion that rising interest rates by the Federal Reserve are positive for financials. I have been disagreeing with this notion all year long and continue to do so.

Federal Reserve Chair Jerome Powell delivered a speech on Wednesday that was viewed as positive for the markets. But when you parse sentences, it’s “If this then that,” which is meaningless gibberish.

As a long-time Fed watcher, I have always been against lowering the Federal Funds rate below 3.00%. With the funds rate at 2.00-2.25%, I see a rate hike in December and two in 2019 taking the rate to 2.75-3.00%.

More important, and bearish for the markets and the banking system, is the unwinding of the Fed’s balance sheet. The balance sheet now totals $4.106 trillion, down $394 billion since the end of September 2017. Before the end of 2018, another $60 is expected to be drained.

In 2019 and 2020, the projected drain is an additional $1.2 trillion. By the end of 2020 the Fed balance sheet is projected to be $2.845 trillion. This will be the biggest challenge for the economy, the markets and the banking system.

FDIC Chairman Jelena McWilliams continues to warn about conditions on the banking system: “While the performance results were strong, the extended period of low interest rates and the competition to attract loan customers have led to heightened exposure to interest-rate risk, and credit risk. Banks must maintain prudent management of these risks in order to sustain lending through the economic cycle.”

When analyzing FDIC data for the third quarter, you begin with the four “too big to fail” money center banks, as they continue to control more than 40% of the assets in the banking system. Total assets among these banks rose to 41% in the third quarter.

Asset Breakdown for the Four “Too Big to Fail” Money Center Banks

Assets For The TBTF Banks

Scorecard For The “Too Big To Fail” Money Center Banks

Scorecard For The TBTF Banks

Bank of America (NYSE:BAC) set its 2018 high of $33.05 on March 12 and set its 2018 low of $25.88 on October 26. The stock is in correction territory 14% below the high. My annual value level is $20.93 with a semiannual pivot at $28.47 and my quarterly risky level of $38.11.

Citigroup (NYSE:C) set its 2018 high of $80.70 on January 29 and set its 2018 low of $61.73 on November 23. The stock is in correction 18.7% below the high. My monthly value level is $61.21 with semiannual and annual risky levels at $72.47 and $73.43, respectively, and my quarterly risky level of $88.59.

JPMorgan (NYSE:JPM) set its 2018 high of $119.33 on February 27 and set its 2018 low of $102.20 on July 6. The stock is 7% below the high. My annual value level is $93.20, with my monthly and semiannual pivots at $104.58 and $109.39, respectively, and my quarterly risky level of $135.15.

Wells Fargo (NYSE:WFC) set its 2018 high of $66.31 on January 29 and set its 2018 low of $50.02 on October 24. The stock remains in correction territory 18% below the high. My monthly value level is $50.17 with a semiannual pivot at $57.40 and quarterly and annual risky levels of $65.71 and $67.18, respectively.

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 10 years ago. Today, there are new exposures to worry about.

The FDIC Quarterly Banking Profile For The Third Quarter Of 2018

Key Data From The FDIC

Courtesy of the Federal Deposit Insurance Corporation

The number of FDIC-insured financial institutions fell to 5,477 in the third quarter, down from 5,542 in the second quarter. At the end of 2007, there were 8,533 banks, with 76 on the FDIC List Of Problem Banks versus 77 today. The number of employees in the banking system decreased to 2.07 million in the third quarter, down 6.5% since 2007.

Total Assets was reported at $17.67 trillion in the third quarter, up 35.5% since the end of 2007.

Residential Mortgages (1 to 4 family structures), which represents mortgage loans on the books of our nation’s banks. Production rose to $2.11 trillion in the third quarter, still 5.9% below the pace at the end of 2007.

Nonfarm / Nonresidential Real Estate Loans have expanded throughout the “Great Credit Crunch”. This category of real estate lending expanded to a record $1.427 trillion in the third quarter, up 47.4% from the end of 2007.

The banking system faces the risk of loan defaults related to retail stores and malls.

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 $350.9 billion in the third quarter, up just 0.6% sequentially, but are 44.2% below the level at the end of 2007.

The market for new homes is slumping, and 327 community banks are overexposed to C&D lending.

Home Equity Loans represents 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 2.1% in the third quarter to $381.6 billion, down 37.7% since the end of 2007.

Total Real Estate Loans had a sequential growth rate of just 0.5% in the third quarter to $4.27 trillion, down 4% since the end of 2007.

Other Real Estate Owned declined by 5.5% in the third quarter to just $7.19 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, totaled $209.8 trillion in the third quarter, up 26.3% 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 third-quarter DIF balance is $97.6, up 86.2% since the end of 2007.

Insured Deposits rose to $7.376 trillion in the third quarter and is up 71.9% 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 1.36%, so this requirement has been met.

Reserves for Losses rose slightly to $123.7 billion in the third quarter, which is still 21.6% 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 $101.3 billion in the third quarter, 7.9% below 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.