Is The Banking System's Health Actually Improving Or Contained?

FDIC-Insured Institutions’ Loan Performance: 30-89 Days Past Due

There is a lot of talk about an economic rebound going on right now and that it may be well underway. The financial markets are what took our economy down with force. We think this is an important metric to keep your eyes on. We think all of us have contributed to the conversations and debates about our economy, but how many of us have actually went through the data of importance? For example, do you know if FDIC-insured institutions are experiencing a real improvement in their loan portfolios? Is the pipeline for loan defaults bigger or smaller today than in 2009? What about for 2008?

Banks such as Citigroup, Inc. (NYSE: C) and Bank of America (NYSE: BAC) are able to grow to such a monstrous size because they are backed by the full faith of the U.S. Government’s FDIC depository insurance programs. In fact, all banks in the Financial Select SPDR ETF (NYSE: XLF) that have U.S. deposits are FDIC insured. The Federal Deposit Insurance Corporation, or FDIC for short, is a critical component to our country’s success. The financial markets would not exist to the sizes they presently are at without it. Understanding this importance one must look at the data posted by the FDIC quarterly!

We feel one of the most important metrics to watch is the amount of loans seeing payments 30-89 days past due. This could suggest to us if the problem in the financial system is – at bare minimum – contained. If the amount of loans seeing payments 30-89 days past due is decreasing quarter over quarter, then we could suggest that the pipeline for potential sour loans going forward is diminishing. This is extremely important! Why would anyone want to invest risk capital to banks if the problem is not even contained? Let’s take a look at the chart below to see how loans are performing by FDIC backed institutions.

Bad Loan Pipeline Improving?

Q1 1991 to Q3 2010: Click on image to expand image.

The graph above (click here to enlarge) shows the total amount of dollars of loans held by FDIC-backed institutions were 30-89 days late. This graph, from right to left, starts with the first quarter of 1991 and ends to the left, with the third quarter of 2010. The 4th quarter data is not available yet for 2010. All of this data was taken from FDIC’s website and then crunched into a chart. Now let’s zoom into the last few year’s of data below:

Our analysis of the banking system is that there are valid improvements underway, but they are still far from perfect! We would definitely like to note that the trend is IMPROVING. Yes, that is right, FDIC-insured institutions are starting to experience improvements in their loan portfolios’ performances. Although the trend is improving, there are more loans 30-89 days past due in the 3rd quarter of 2010 then there was during all quarters in the 1990′s as well as every quarter in the years in the 2000′s (except for 2008, 2009 and 2010.)

So what does this mean for stocks? Absolutely nothing. Now you must determine if this is being priced into the markets already or not. Will bank stocks like Bank of America (BAC) and Citigroup (C) experience appreciation? Will the Financial Select SPDR ETF (XLF) pop? We’ll leave these answers up to mother markets as time will only tell. One thing is certain though: the loan portfolios of FDIC-insured institutions will likely experience quarterly improvement if the trend in loans 30 to 89 days late continues to improve.

Source: shaneEdmund.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I do carry a position in a small, regional bank that is FDIC insured or not directly related to this article.