The latest FDIC Quarterly Banking Profile shows a negligible decline in problem banks but the banking industry remains in intensive care.
The banking industry reported a $28.8 billion profit for the second quarter which was $7.9 billion higher than last year’s quarter ending June 30, 2010. The bulk of the profit improvement, however, came from lower loan loss provisions as has been the case for each of the last seven quarters.
According to FDIC Acting Chairman Martin Gruenberg, “Banks have continued to make gradual but steady progress in recovering from the financial market turmoil and severe recession that unfolded from 2007 through 2009.”
The “gradual” recovery of the banking industry is not being bought by Wall Street investors, nor does it matter. More important is where we go from here and the recent plunge in bank stock prices seems to be indicating that investors expect another banking crisis. The outlook on the banking industry is so negative that many banking analysts are predicting that the Bank of America will fail and wind up in the hands of regulators.
Excessive levels of debt and leverage have not been reduced and the European banking crisis continues to move towards critical mass as country after country heads towards sovereign default. The political system in the US is broken, the Federal Reserve is running out of conventional policy options, soaring gold prices are predicting a major debasement of the US currency and the average person is starting to figure out the US government has gone far beyond reasonable levels of indebtedness.
The FDIC Quarterly Banking Profile (QBP) shows that 60% of banks reported an increase in profits from a year ago and 15.2% of banks reported losses, down from 20.8% a year ago.
Loss provisions for the second quarter of 2011 declined by $21.4 billion from last year to $19 billion. Banks continue to struggle for organic growth as evidenced by the decline of $3 billion (1.8%) in net operating revenue from last year.
Loans and leases 90 days or more past due fell for the fifth consecutive quarter but a new wave of mortgage defaults appears to be starting. According to the Mortgage Bankers Association, the most recent national delinquency survey report for second quarter 2011 shows that “delinquencies are no longer improving and are now showings signs of worsening.”
The MBA survey showed a decline in delinquencies three or more payments past due (similar to the QBP) but cautioned that the drop in long term delinquencies (90 days or more past due) was “offset by an increase in newly delinquent loans one payment past due.” If the economy enters another recession, which seems likely, many of the newly delinquent mortgage loans will default and wind up in foreclosure.
The number of banks on the FDIC Problem Bank List declined marginally from 888 to 865 in the second quarter. After taking into account the 22 banking failures during the second quarter of 2011, the number of problem banks was essentially unchanged and remains at the highest levels since March 1993 when there were 928 problem banks.
Nearly 12% of all FDIC insured institutions are classified as problem banks. The number of problem banks has officially declined for the first time since the quarter ending September 30, 2006. The total assets held by problem banks declined from $397 billion to $372 billion.
For the first time in two years, the FDIC Deposit Insurance Fund showed a small positive balance of $3.9 billion. Total assets of FDIC insured institutions is almost $14 trillion.
Loan growth remained very slow with only a 0.9% ($64.4 billion) increase in total loans and leases. This was only the second quarterly increase in loan portfolios during the past 12 quarters.
Large banks saw a sizable inflow of deposits as nervous investors fled to the safety of FDIC insured deposits. During the quarter, deposits increased by $234.4 billion and deposits in accounts over $250,000 increased by $279.6 billion or 8.8%. The FDIC has temporary unlimited deposit insurance coverage on noninterest bearing transaction actions. Some banks have started charging fees on large deposits. The banks cannot profitably invest the excess cash deposited with them and the monies are subject to FDIC deposit insurance fees which puts banks in the position of losing money for taking deposits. The majority (82%) of the deposits of nervous money went to the ten largest US banks.
The banking industry remains in precarious condition as admitted by FDIC Gruenberg who stated that “Recent events have reminded us that the US economy and US banks still faces serious challenges ahead.”