Wednesday, May 27, 2009

Banks’ Balance Sheets Continue to Weaken

Following up on my previous report, banks’ balance sheets show no signs of improvements during the first Quarter of 2009. In fact, key ratios demonstrating bank weaknesses have increased—in some instances they have surpassed all-time highs. At the very least, until these figures reverse, all talk about “green shoots” and “economic recovery around the corner” must be taken with exceeding caution. This is what I found.

Net Loan Charge Offs-to-Total Loans at commercial banks increased to 1.75% as of 3/31/09, up from .96 reported during 4th Quarter 2008. The ratio has more than doubled year-over-year from .64 in 3/31/08. This figure is rapidly approaching the 1.81% peak reached 12/31/91 [see here].

Loan Loss Reserves-to-Total Loans ratio increased to 2.64% from 2.30% reported on 12/31/2008 [see here]. In particular to banks whose assets fall between $1 billion to $15 billion, the increase was from 1.89% to the current figure of 2.08% [see here]. For the biggest banks, that is those with assets in excess of $15 billion, the current figure stands at 2.96%, up from 2.53% reported the previous quarter [see here].

Considering Net Loan Losses-to-Average Total Loans, the most recent figure broke the all-time high of 1.6. Currently, the ratio stands at 2.02%, which is more than two times higher on a year-over-year basis [see here]. For banks with average assets of $1 billion to $15 billion, the ratio currently stands at 1.63%, up from 1.22% reported the prior period and getting closer to the peak amount of about 1.8 in 1991 [see here]. For institutions exceeding the $15 billion average assets threshold, the figures continue to be abysmal: The ratio currently stands at 2.35, which breaks the all-time high amount of 2.3 reported in 1990. During the last twelve months, this ratio has more than doubled, which indicates a worsening banking condition [see here]. The next key statistic to consider is Non-Performing Loans-to-Total Loans. You may recall that Non-performing loans constitute past-due principal and interest in excess of 90 days. These are bank assets that will most likely turn toxic. The current figure stands at 2.19%, up from 1.70% reported the previous quarter and up from .78% reported on 3/31/08 [see here]. At its peak for all commercial banks, the ratio stood at 4.88%, so the trend is evident that the figures will continue to deteriorate. The same ominous gap is present for all banks exceeding $1 billion in average assets [see here, here, and here]

As I stated previously, banks’ balance sheets have deteriorated and will continue to get worse. The trend demonstrates that non-performing loans will continue to increase. Many of these loans will be charged-off. Loan loss reserves, which buffer against defaults, are not sufficient to cover the potential losses: In fact, as the Wall Street Journal reported, ratio of reserves to noncurrent loans fell to 66.5% in the first quarter, down from 74.8% in the fourth quarter and the lowest level in 17 years [see here].

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