The American banking sector remains devastated by the credit crunch and the recession.
A huge number of banks are in trouble, there’s been a record fall in lending, commercial real estate is falling, dragging many banks with it, and yet there are emerging signs of an improvement, certainly compared to the start of 2009.
The key US bank regulator, the Federal Deposit Insurance Corporation (FDIC), is more known for its Friday night seizures of failing banks: 50 alone in the September quarter and 124 so far in 2009. But it also issues a quarterly report on the health of US banking, and although many of the statistics in the September assessment make for terrible reading, there are not the signs of complete panic and disaster as there was earlier this year.
The FDIC said in its latest quarterly report that the number of bank failures in the quarter and so far this year is the worst since 1982.
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Despite the collapse of 50 banks in the quarter, the number of banks on its so-called watch list jumped to 552 at the end of September, a rise of 33% from the figure at the end of the third quarter of 416.
The FDIC said that many of these banks were small, but had relatively large exposures to the imploding commercial real estate sector. A Moody’s warning this week that more problems lie ahead for US banks in the commercial real estate sector, won’t help.
The insurance fund that protects more than $US4.5 trillion of US bank deposits slipped into the red at the end of September, dropping by $US18.6 billion during the quarter to negative $US8.2 billion, as the FDIC had to set aside $US21.7 billion in provisions for losses from the growing list of bank failures. It is only the second time in the agency’s history that the balance has fallen into negative territory.
And to cover possible losses next year, the FDIC has already called for the industry to prepay $US45 billion in assessments for the next three years by the end of December. That prepayment is already causing pain to banks large and small. For many it will mean four yearly payments in the one 12-month period for the FDIC to insure deposits of to a maximum of $US250,000.
Despite the rising toll of failures and losses, US bank profitability moved back into the black in the quarter: a modest $US2.8 billion profit in the third quarter of 2009, as securities portfolios recovered and small banks (with less than $10 billion in assets) saw margins improve. Bank profits were more than triple the $US879 million they earned in the third quarter of last year and the rotten $US4.3 billion loss in the second quarter of 2009.
And in more good news, of the more than 8000 banks and savings and loans in the FDIC’s report, 96% were well-capitalized and average industry regulatory capital ratios hit their highest levels in 19 years at the end of September.
But the FDIC said bank loan balances plunged by a massive $US210.4 billion in the quarter as they continued to shed clients, cut credit limits and cut overall lending. That fall in loan balances was 2.8%, the largest percentage drop on record. Balances declined across all major loan categories, with commercial and industrial loans falling by $US89.1 billion, or 6.5%, as more and more loans in this year went into default or arrears.
The FDIC’s report shows delinquent loans are still hurting US banks with loan loss reserves topping $US60 billion for the fourth quarter in a row and banks charged net $US50.8 billion in losses and provisions during the third quarter, an 80.5% jump from the third quarter of 2008. The industry’s annualised net charge-off rate rose to 2.71% of all loans, the highest since records began in 1984 and a sure sign of the pain banks are feeling at the moment.
US banks set aside $US62.5 billion to cover deteriorating loans, down 7.1% from the prior quarter, but loans are continuing to deteriorate at a rapid pace. The FDIC figures showed that the percentage of loans that were 90 days or more past due rose to 4.94% of total loans, the highest level in the 26 years that banks have reported the data.
And although house prices again rose in September in the Case/Schiller Home Price Index (and have now risen for two successive quarters), the rise was small, 0.3% against hopes of a larger rise.
And a research firm that assesses the quality of US home loans says that almost one in every four US mortgage is now negative, with the value of the home being lower than the amount owed.
Research group, Corelogic said that 23% of people with mortgages owe more than their home is worth. That means about 10.7 million US mortgages were underwater in September, with another 2.3 million homeowners are within 5% of negative territory. The two figures combined comprise almost 28% of all residential properties with mortgages.
The rise in house prices since April in the Case Schiller Index, the most widely respected of all home price measures, has had no impact on this figure or on delinquencies, which are also at record levels.
That’s a continuing worry for all US banks.