Non Performing Loans at US Banks

Despite concerns about the fiscal cliff, it should be encouraging to investors that bank stocks have held up quite well over the last couple of months.  It seems that sentiment may have finally turned for the group, especially for Bank of America, which regained the $10 level yesterday yet still trades for a little over 50% of book value.

The banking system has healed a lot since 2008 and profitability has almost returned to old highs.  However, non-performing loans remain piled on US banks' books and probably will stay there for years to come.  According to recent FDIC data, non performing loans (NPL) as a percentage of all loans at FDIC insured banks are still higher than they were at the peak of the S&L crisis.  

While it's an interesting data-point, this isn't necessarily cause for alarm because NPLs are supposed to be written down to fair value when they go to non-accrual status.  This means that as long as housing prices remain stable, these loans probably wont have to be written down any more.  Also, just because a loan is marked as NPL doesn't mean that it's not still paying.  In fact, many of these loans are probably still generating cash flow for the banks that hold them.

Citi Share Price Performance Under Pandit

Vikram Pandit unexpectedly stepped down from the head of Citibank today, which caps off a troubled run.  Pandit was thrown into an impossibly difficult situation on December 11, 2007, but it's tough to say that his time as CEO was successful.

Under Pandit, Citi's shares lost 88% of their value, which is the worst performance of any large bank that's still standing.  While there's not much that Pandit could have done to prevent the decline, he may have been able to mitigate it if he had controlled the dilution of his shareholders a little better.

Many may not remember, but Vikram Pandit allowed Treasury to convert TARP money from preferred to common shares on February 27, 2009, just days before the market bottomed.  It was the only major bank that did so at that time.  We may never know to what extent he was forced to do this, but we do know that Pandit himself was the one who caused the bottom in the stock market only 10 days later.  He sparked a massive rally when he quietly leaked that Citi had been profitable for the first two months of the year.  Why did Pandit subject his shareholders to such heavy dilution when things were so much better than the market realized?  Sadly, Citi shareholders may never know.

What Percent of Bank Holding Company Assets are Held at Commercial Bank Subsidiaries?

The New York Fed is putting together a new banking industry report which can be found here.  It's not as comprehensive as the one that the FDIC puts together on a quarterly basis, but it is valuable in that it goes beyond just the commercial bank subsidiary and looks at the whole bank holding company.  As the following chart shows, less than 80% of assets consolidated on an average Hold Co's balance sheet are held in the commercial bank.  Some other interesting data on BHCs is also below including geographic exposure of systemic assets (i.e. to Europe).

Regions Financial Loan Line Utilization

More from the Barclays Financial Services conference...a slide from Regions Financial, a southern regional bank with +$100B in assets which had a lot of trouble with credit quality during the crisis.  The slide below shows loan line utilization improving.  It's a big step forward for this bank just to not have to focus on credit quality, the fact that they are focusing on loan growth shows how far the banking sector has come since '09.

More Confirmation that the Housing Market May be Turning

In the Federal Reserve Senior Loan Officer Survey released yesterday, there was a good sign for the housing market in that more banks are reporting increasing demand for mortgage loans.  The bad news is that while the demand is picking up, banks are still not loosening credit standards much, and actually reported tighter standards last quarter.

Did the Repeal of Glass Steagall Cause the Financial Crisis?

Sandy Weill, former CEO of Citigroup caused a stir today by commenting that Glass Steagall should be reinstated.  Since he is the person who pioneered the integrated banking model, the comments are shocking.  The comments are puzzling too because even if one thinks that separating commercial and investment banks would create more stability in the long term, it's not entirely clear that the financial crisis stemmed directly from the integration.

Empirically, not a single integrated bank failed in 2008/2009.  Lehman and Bear were not commercial banks, and Indymac and WaMu weren't investment banks.  AIG, Fannie and Freddie were not banks of any sort.  In fact, Goldman and Morgan Stanley (along with some insurance companies) were saved by converting to bank holding companies so that they could access liquidity at the Federal Reserve.

The argument for a separation of commercial and investment banking activities perhaps stems from the belief that depositors ("main street") need to be protected from the volatility of securities markets. However in today's economy, only a tiny portion of household savings is held as deposits anyways, so the savings of main street are far from insulated from a collapse of an investment bank (even if it were separated from the commercial banking system).

Below is a list of bank failures in 2008.  Note that Lehman, Bear, AIG, Fannie and Freddie are not on the list.  In all, 447 banks have failed between 2008-2012.  The vast majority were community banks that were in "less risky" lending businesses.  The fact is that banking is risky business in any form.

2008 Bank Failures

WFC 2Q12 Conference Call Highlights

Quotes from 2Q12 WFC Earnings Call

• organic growth in both commercial and consumer portfolios.

• average core deposits up $10.1 billion from the first quarter, up $73.2 billion or 9% from a year ago. 

• net interest margin was unchanged at 3.91%

• established an efficiency ratio target of 55% to 59%

• charge-offs were...1.15% of average loans, down...$3.2 billion or 59% [from 4Q09 peak].

• Nonperforming assets were down $1.8 billion from the first quarter, down 11% from a year ago. NPAs were 3.21% of total loans in the second quarter, the lowest level since 2009.

• Our estimated Tier 1 common equity ratio under the latest Basel III...7.78% for the second quarter

• Return on assets was 1.41%, the highest in 16 quarters and within our target range of 1.3% to 1.6% that we provided on Investor Day. Our ROE grew to 12.86%, also within our target range of 12% to 15%

• I think the market continues to provide opportunities for firms that have the liquidity and the capital to [make acquisitions]. Whether or not we'll be successful, I certainly can't promise you because we turn down more than we pursue.

• We're not taking any significant duration risk or any significant credit risk [in the securities portfolio]. This is still a very high-quality portfolio and the duration is relatively short.

• Random quote from Stumpf that typifies WFC culture: But, Mike, we will not stretch for something. If -- I mean, that we -- it's just not in our culture to do that. So if we happen to have something that goes down one quarter, that's life.

Deposit Growth at US Banks

Citigroup reported strong earnings this morning as did JP Morgan and Wells Fargo last week.  All three banks also reported strong deposit growth as well.  Systemically, despite low interest rates, US banks have been growing deposits at an above average rate.  Y/Y, savings deposits grew by 11.5% as of the week of July 2.  On average, since 1985, savings deposits have grown by 8.4% Y/Y.  The higher than average growth in deposits since '09 suggests that Americans are more comfortable saving via deposits rather than capital markets.