Q4 FDIC Banking Stats - Durable Recovery?

The FDIC banking profile for the fourth quarter came out yesterday. The following are highlights of the report with my comments. I continue to closely monitor the banking system because while the acute phase of the crisis is long over with, debt defaults are still at record levels. Additionally, while the banking system is slowly being recapitalized through ZIRP and equity issuance and rationalized through shotgun weddings, it is still not functioning "normally". I should clarify that the shadow banking system (as epitomized by the MBS and CMBS market) is still basically crippled (yes credit card deals have returned). Meanwhile, the regular banking system is doing what it would normally do in this part of the cycle, which is keep lending standards tight, take losses and respond to the low level of actual credit demand from gold plated borrowers. The regular banking system which makes loans and keeps them on its books, still has some heavy losses to slog through and many with high concentrations of construction loans will not make it. That said, the FDIC seems to be merging these bad actors together with healthy institutions at a reasonably good pace. As merger activity recommences we are likely to see a new tier of mid-sized banks built, that can better compete in the marketplace with the industry giants, and have the underwriting skills to eventually start to absorb some of the borrowing needs of CMBS borrowers (albeit on terms and at rates those borrowers are unlikely to be happy with). At this point I am monitoring the bank statistics less as a "death watch" and more as a guide to the "headwinds" facing an economy that looks like it wants to recover, but I don't want to get ahead of myself. Let's check out the latest data:

FDIC banks posted a $914 million profit in Q4 2009 vs. a $37.8 billion loss in Q4 2008.
This is basically a break-even performance, nothing to write home about, but it's better than the total meltdown that was Q4 2008.

For the first time in 3 years, more than half of banks saw a year-to-year improvement in profits.
Frankly with the abominable performance of Q4 08, that's pretty disappointing. I would note however, that a lot of the losses in Q4 08 were big banks taking mark to market losses, this year's Q4 was characterized by big banks making money and small banks playing catch down, by taking realized losses or writedowns on actual non-current loans (rather than trading assets) unrelated to market performance. Indeed, the FDIC points out in its report that while all banks size ranges reported increased ROAs year-to-year, only the largest banks had positive ROAs. Additionally, the FDIC report notes that trading profits were $2.8 billion in the quarter, versus a loss of $9.2 billion last year.

Quarterly loan loss provisions fell year-to-year for the first time since Q3 2006 and the $61.1 billion of loan loss provisions was the smallest amount set aside since Q3 of 2008. One might find this to be questionable considering the continued degradation in bank asset quality, as non-current loans and leases on banks books rose 67.5% year-to-year and 6.6% from Q3, except for the following:

Loans & leases 30 - 89 days past due (the leading edge of loans going bad) declined 11.9% year-to-year and 1.5% quarter-to-quarter. I have built a little graph of the < 90 day delinquency and the greater than 90 day delinquency (also known as "noncurrent assets") data as well as net charge-off data, which you can see below. (Please note that the data is revised by the FDIC with each quarterly report they put out, but I couldn't find the entire data set, so in each case I use the freshest data point available - the numbers don't move around enough to change the trend.)

A couple of observations are worth making. As you can see, loans 30 to 89 days past due peaked in Q4 of last year. So technically, loan delinquencies are improving. Note that many times a loan that is 30 to 89 days past due can be rehabilitated, but when you get past 90 days generally the borrower is going south on you. So I would take the "improvement" we have seen in this metric with a grain of salt relative to the obnoxious trajectory of loans > 90 days past due. Now of course the > 90 day category of bad loans accumulates as the 30 to 89 day delinquencies that don't get fixed rise. However, these bad loans are also worked out...the hard way....through the bank taking possession of the collateral, selling it and taking a charge-off for any amount not recovered from the sale. Now you can see from the graph that that net charge- offs continue on an upward trajectory, but are much smaller than loan delinquencies. This in part reflects severity (the amount actually lost when a bank sells the underlying property it lent against) as well as the lag in the amount of time it takes to actually foreclose and sell the collateral. My guess is that severity is actually pretty bad considering the loan to value ratios banks were allowing and the severe declines in the value of most real and personal property banks would lend against. The absolute levels of both 30 - 89 day past due loans and charge-offs most likely are being most heavily influenced by a severe backlog of dud loans to be dealt with, long processes for dealing with them and illiquid markets to sell into. All in all there are some rays of light here with regard to loan delinquencies, but expect charge-offs to continue rising and possibly go ballistic in upcoming quarters as the backlog of bad loans is dealt with.

While bank managements are up to their assets in alligators and dedicating lots of time to working out sour loans and disposing of collateral, it would seem pretty obvious that there is neither time nor predilection to make lots of new loans. As you can see from the chart above, lending by FDIC banks is still contracting. Most importantly, the amount of loans that directly lead to job growth like commercial and industrial loans and construction and development loans are still falling rapidly. Only home equity and the non-farm non-residential category (which likely relates largely to permanent loans for commercial real estate) are stable to rising. (Although I didn't include them to keep the chart digestible, farm loans and credit card loans are flattish since Q408).

While I would expect loan growth figures to lag the economic rebound, without the economic oxygen of lending related to job creation (and no shadow banking market to speak of) the durability of this recovery must still be questioned.

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