Friday, May 21, 2010

Banking Sector Problems Accelerate

While the banking sector reported a profitable quarter for the first 3 months of 2010, problems are continuing to escalate.

The Federal Deposit Insurance Corporation (FDIC) reported an aggregate profit of $18.0 billion in the first quarter of 2010 for the commercial banks and savings institutions it insures, which was a $12.5 billion increase from the $5.6 billion earned for the similar period of 2009.

A small majority of all institutions reported year-over-year improvements in their quarterly net income.  Those reporting net losses for the quarter were 18.7%, compared to 22.3%  a year earlier.  The average return on assets (ROA) rose to 0.54% , from 0.16%  a year ago.  This is the highest quarterly ROA for the industry since the first quarter of 2008.

The primary factor contributing to the year-over-year improvement in quarterly earnings was a reduction in provisions for loan losses.  While first-quarter provisions were still high at $51.3 billion, they were $10.2 billion (16.6%) lower than a year earlier.

The number of institutions on the FDIC's "Problem List" rose to 775, up from 702 at the end of 2009.  This represents 10% of all insured entities and is a dramatic rise from 252 at the end of 2008.

The total assets of problem institutions rose approximately 7% during the quarter from $403 billion to $431 billion.  These levels are the highest since June 30, 1993, when the number and assets of problem institutions totaled 793 and $467 billion, respectively, but the increase in the number of problem banks was the smallest in four quarters.

While The Deposit Insurance Fund (DIF) balance improved for the first time in two years, its net worth is still NEGATIVE $20.7 billion - a negligible increase from the $20.9 billion deficit at the end of 2009. 
The fund balance includes a whopping $40.7 billion contingent loss reserve that has been set aside to cover anticipated future losses.  Combining the fund balance with this contingent loss reserve shows total DIF reserves of $20 billion. 

The FDIC's liquid resources stood at $63 billion at the end of the first quarter, a decline from $66 billion at year-end 2009.  In order to maintain emergency liquidity, the FDIC Board approved a measure on November 12, 2009, that required most insured institutions to prepay approximately three years' worth of deposit insurance premiums – about $46 billion – at the end of last year.
Despite the sanguine nature of the FDIC report, major problems persist.  Poor loan performance in other sectors continued to hurt banks, with the total number of loans at least 3 months past due climbing for the 16th consecutive quarter.
Banks have been hurt by non-performing loans and the continued recession, causing them to dramatically reduce their lending.  Commercial and Industrial Loans are down 25% from their peak.  The industry's total loan balances grew by 3% during the quarter, but the increase was due to accounting changes.  Without taking into account these changes, lending would have declined for the 7th straight quarter, as banks cut back across most major lending categories.
While the FDIC believes that problem banks will peak this year and decline smoothly thereafter, their optimism appears to have little basis.  As the economy slips into the "Second Dip" of this "Double-Dip Hyper-Inflationary Depression" and the crisis in debt within the Euro-Zone intensifies, it is hard to believe that we are anywhere close to a termination of problems in the financial sector.
Marko's Take
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