Commercial Banks are Recovering

Wed, Sep 1 2010, 12:34 GMT
by BBVA Bancomer Team


FDIC Banking Profile 2010Q2

  • All loan delinquency rates improved, but this is the start of a lengthy recovery process
  • The net charge-off to total loans declines for the first time since the start of the crisis
  • The industry as a whole reported 10Q2 $21.6bn net income and lower provisions for loan losses

Delinquency rates improve across all loan categories

In-line with our expectations, today’s data release is a confirmation of recovery in the commercial banking system. Data from the Federal Deposit Insurance Corporation’s (FDIC) Quarterly Banking Profile for 2010Q2 suggests that delinquency rates in all loan categories declined (see Table 2 on Page 3). This across-theboard decline is the first since the start of the financial crisis. The most important feature of this ameliorating asset quality is the decline in residential and commercial real estate (CRE), the sum of which represents the bulk of the commercial banking system’s loan exposure. Within CRE, the delinquency rate on multifamily residential loans posted the largest improvement, from 6.5% in 2010Q1 to 5.8% in 2010Q2. Construction loans showed stability by declining to 19.3% this quarter from 19.8% in the last quarter. Nonfarm and nonresidential loans decreased moderately from 5.7% in 2010Q1 to 5.5% in 2010Q2.

Although other real estate owned grows on balance sheets as foreclosures progress, commercial banks’ loan loss allowance to total loans and net charge-off to loans declined for the first time since the housing crisis emerged (see Chart 6). Steady progress in asset quality combined with improvements in balance sheet conditions will eventually allow the commercial banking system to gradually loosen lending standards and generate credit growth. This is somewhat reflected in the increase in problem institutions from 775 to 829 (10.6% of all FDIC-Insured institutions), but a decrease in problem institution-related assets from $431bn to $403bn (3% of assets of all FDIC-Insured institutions). In other words, more problematic firms may exist, but the scale of that problem is declining.

Earnings and loan loss provisions headed in the right direction
Loan loss allowances for commercial banks declined from $248bn in 2010Q1 to $237bn in 2010Q2, a trend that underscored the improved ability of commercial banks to generate profits with incrementally-abating asset quality indicators. Although loan loss provisions remain high, this first decline in recent memory suggests commercial banks are more comfortable about the future. For the entire banking industry overall, earnings for 2010Q2 of $21.6bn are a stark contrast from a year-ago loss of $4.4bn.

Deleveraging continues: assets continue to decline and equity raisings proceed
According to our measures of deleveraging, the commercial banking system this quarter posted the highest rate of deleveraging since 2009Q3 (2010Q1 is FASB-adjusted). The FDIC also reported that rising securities values contributed to equity capital growth in the banking system. For the industry as a whole, retained earnings contributed $8.7bn and appreciation of securities holdings added $13.7bn. This continued commercial bank deleveraging is consistent with a slower or more moderate recovery of economic growth.