We received the 1st Quarter of 2011 research dataset from the FDIC at Institutional Risk Analytics yesterday. The computers churned the data overnight so our customers could begin to look at the surveillance analytics for their banks of interest this morning. I've been staring at the summary statistics for the industry today and file the following observations for those of you entertained by how this is all playing out.
Stress: Forks in the Road
There's a fork in the road for the stressed out TBTF's. At the end of 2010, we were tracking some of the 545 institutions representing $4,909B in assets that had an IRA Bank Stress Index grade of B. This was an interesting population of "large complex institutions" (LCI's) dealing with the indigestion of rotting mortgages in their bellies.
Come the end of 1Q2011, forty-four of these banks exited the B grade column and look to have split with one group representing maybe $3.1T in assets migrating back up to A stress grade condition and another faction worth approximately $1.6T dropping further down to join other banks in the C column. We are just beginning to look at what commonalities are shared by these two emerging clusters of larger institutions but for me it begins to add a little more clarity to the musing I referred to in the article I filed a couple of days ago, "Bank Fail" Pondering the Unthinkable .
There's another major note in this quarter's data on the small bank side. A little over 500 of them joined the A+ grade stress silo this quarter, quite a number of them going from F to A+ as they begin to show positive operating income again. The most common strategy we see is an adoption of a mixed business operating profile cutting back on lending and favoring the use of money to put into investment assets made so attractive by quantitative easing. Clearly, the economist's view that encouraging all banks to migrate towards post Glass-Steagall portfolio management profiles is tickling down. That's good news for Wall Street. Read on for what it means to Main Street.
Deposits: Big Winners
The news in bank deposits country for Q1 is that the big banks continue to be the big winners. The over $65B size institutions hold just over $6T in deposits versus $3.6T by all the smaller banks combined. More important, the big banks have grown deposits by $1T since June 2008 while the smaller bank group has stayed flat only moving up $100B in deposits in the same time.
More interestingly, this winning formula by the big banks has been happening in the low or no interest paying checking and savings accounts category. Interest paying time deposits are way down at the big banks, a much deeper decline than experienced at the smaller institutions. This means the cost of doing business for these big banks is materially advantaged versus the smaller group. I'm not saying I like it. What I am saying is despite people in America whining about "Too Big To Fail", the deposits story says Americans still bank there. The big banks have known this all along of course. Now you do too.
Lending: Still a Dearth
Back in January I filed a blog on The Huffington Post titled "A Deepening Dearth of Lending". That trajectory towards that dearth remains in effect. Total bank industry lending is now down about $800B since June 2008. Bank willingness to extend commitments to borrowers is down around $2T in the same timeframe. That's a lot of private capital energy taken out of the economy. The bank's reluctance to lend manifests as a steady flight to quality. We see them hammering down annualized gross default rates - a measure of operating stress - from a peak of 302 basis points (bp) this time last year to around 211 bp this quarter. That's still elevated compared to the 127 bp it was in June 2008 so the pressure to stay stingy doesn't look like it's gone away just yet. The flight to quality also shows loss given default rates have come down now to 86.8% which is actually below the 90% it was in 2008. The message of these numbers is clearly that you'd better have stellar credit to ask for credit. But you already knew that. Now you have a little better picture of how much it matters to your banker.
Distressed Real Estate: The Workout Continues
The news is that real estate lending for the banking industry is getting safer. The annualized gross default rate for residential real estate is down from a peak of 212 bp a year ago to 159 bp roughly following the same trend as lending in general. Nationwide R.E. loans have dropped by $634B to $4,161B down from $4,795B in June 2008. Magnitude wise things could have been worse at this point and clearly this apparent stabilization has much to do with the gargantuan efforts of the United States to deliberately spend treasure to buy time.
That time continues to be spent working out the excess inventory of our last mortgage boom. Looking at degraded real estate in particular that data shows that work to stem what was a tidal wave of 30-89 day delinquent loans seems to have gotten us back to the same levels of $76-78B today as it was in 2008 when the swan eggs hatched. This doesn't mean the nest isn't toxic. Over 90 day delinquent real estate presently stands at $105.5B. It was a mere $19B the day the music stopped. Similar large workout inventory remains in Non-Accrual loans that stand at $186B today and Other Real Estate Owned sits at $52B as of 1Q2011. So now you can answer the question, "How much is a glut?"
To see the numbers behind this report go to the IRA Industry Fact Sheet.