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Fallout After The Credit Bomb
This article originally appeared in The Daily Capitalist.
Bank credit and liquidity is something I follow closely because it is a key to economic revival.
Presently banks have been more aggressive in cleaning up their loan books which has required them to recognize troubled loans and reserve more for loan losses. Part of the trend is that bank regulators have been stricter with banks, requiring them to move loans to non-accrual status or "other real estate owned" status. Most of these loans are commercial real estate loans (CRE).
Another part of the trend, the most important part, is that bankers have now realized that renewing loans will not solve their problems:
At the end of the third quarter, roughly 41 percent of the $29 billion of restructured loans among small banks [less than $20 billion of assets] were in default, according to call reports compiled by Foresight Analytics.
That figure indicates some bankers were too hopeful that giving borrowers a little more time with smaller payments would fix the ongoing problems, analysts said.
As one bank representative pointed out, loans cannot be rewritten based on expectations that the borrower's condition will heal before the grace period is up.
"Hope is not a strategy," said Jason Korstange, a spokesman for TCF Financial Corp. in Wayzata, Minn. "You simply have to underwrite these loans to the present conditions, and some are going to qualify and some are not."
Thus more loans are being labeled as "troubled debt restructurings" (TDRs) which allows lenders to take less of a loss than if they moved the loan to non-accruing status, but most significant is that more and more loans are now being labeled TDRs. These banks "reported more than $21 billion nonresidential [CRE] restructured loans as of Sept. 30, rising 63 percent from a year earlier and making up nearly three-fourths of all TDRs." It's not limited to the smaller banks. Banks with more than $20 billion in assets: "TDRs jumped 75 percent at Sept. 30, compared with a year earlier, to $89.7 billion."
The trendline shows that banks are taking care of their problems:
The FDIC reports:
Insured banks and thrifts charged off $42.9 billion in uncollectible loans during the quarter, down $8.1 billion (15.8%) from a year earlier. This is the second quarter in a row that net charge-offs posted a year-over-year decline. Prior to the past two quarters of improvement, quarterly NCOs had increased year-over-year for 13 consecutive quarters. NCOs for most major loan categories declined year-over-year in the third quarter. ...
More banks are also continuing to report an increasing amount of asset sales. The number of banks reporting assets sales has increased 3.2% this year and the amount of assets sold in each quarter has increased 10.4% since the start of the year. In the past quarter 847 banks reported selling $53 billion in loans, leases and foreclosed assets not related to home, consumer or business loans.
As of Sept. 30, the nation's banks reported having $36.1 billion in distressed CRE assets, which includes past due loans on and foreclosed construction and land development, nonresidential income-producing and multifamily properties. That amount is approximately 2.2% of all outstanding loans on construction and land development, nonresidential income-producing and multifamily properties. The third quarter amount is up from $29.4 billion at the end of 2009.
Looking at the bigger picture, total loans and leases of all banks in Q3 declined slightly, 0.1%, or $6.8 billion. This reflects decreased loan demand as well as fear for their reserves. As Sheila Bair said:
"At this point in the
credit cycle it is too early for institutions to be reducing reserves without
strong evidence of sustainable, improving loan performance and reduced loss
rates. When it comes to the adequacy of reserves, institutions should always
err on the side of caution." But Bair also added, "at this point in the
credit cycle it is too early for institutions to be reducing reserves without
strong evidence of sustainable, improving loan performance and reduced loss
rates. When it comes to the adequacy of reserves, institutions should always
err on the side of caution."
Bank earnings for Q3 as reported by the FDIC were up, but not so much from loan growth as from writing off loans and moving loss reserves to income:
Commercial banks and savings institutions insured by the FDIC reported an aggregate profit of $14.5 billion in the third quarter of 2010, a $12.5 billion improvement from the $2 billion the industry earned in the third quarter of 2009. This marks the fifth consecutive quarter that earnings have registered a year-over-year increase.
The FDIC noted signs of further improvement in asset-quality trends as the amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) fell for a second consecutive quarter. Before these two quarterly declines, the industry's noncurrent loan balances had risen for 16 consecutive quarters.
"The industry continues making progress in recovering from the financial crisis," the FDIC chairman [Sheila Bair] added. "Credit performance has been improving, and we remain cautiously optimistic about the outlook. Lower provisions for loan losses are driving bank earnings by allowing a larger share of revenues to reach the bottom line."
So lending continues its slide, but more gradually, as shown in the above chart. The problem is that businesses are still not borrowing for a variety of reasons, but mainly they are not seeing a response from their buyers or consumers. On top of that add the uncertainty of regulation and taxes (regime uncertainty) that they face.
One would hope that the tax compromise announced by President Obama will find its way to his desk soon without change. If so, that would allow businesses to have at least some certainty about taxes and capital expenditures for the next two years. That would be a positive in the economy.
One can argue about the necessity for budget cuts, but the fastest way to balance the budget is to reduce expenditures and reduce taxes which would ultimately yield more revenue for the government from a growing economy. It is still my opinion that growth will be flat and that we will be facing inflation, assuming the Fed continues to monetize federal debt. But money in our pockets will be more "stimulative" than if given to the government to spend. This is a huge, complex issue, which I will deal with soon in another article.
Consumer credit is recovering somewhat but Tuesday's report raises some concerns about its recovery. While consumer credit increased 1.7% in October, the majority of it was from a $1.2 billion increase in student loans which I don't find quite as productive as revolving credit (credit cards) which decreased 8.4% (no gains in this category since August, 2008). Auto loans helped nonrevolving credit increase 6.8%. One interesting statistic came from TransUnion that 8 million card holders stopped actively using their credit cards over the past year.
While the trend is improving, it is still very weak.
Gallup reported Monday that economic confidence dropped again last week:
Gallup's bottom line: their index is about the same as it was this time last year (-28).
Things are trending up, but slowly and weakly, which should continue for quite some time.
NB. Jobs report comes out Thursday.
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@because it is a key to economic revival
no its not the key... its again money manupulation..
there's no need money money .. its too much already...
KEY IS STOP BUYING CHINESE JUNK AND BRING BACK HOME ALL THOSE
MIDDLE CLASS PAYING SALARIES.. 20-30$ PER HOUR..
until then down down down..
alx
junk as always
@Things are trending up, but slowly and weakly, which should continue for quite some time.
sure... and next year FED deficit is gonna be 2-2.2 trln $.. 2012 also +2 trln$..
and then bond holders just simply will sell US gov bonds,,%rate will spike up,,
8,10% for 10yy and tne sudden collase..
trending up MY ASS
alx
"Presently the banks," said Bernanke, "have been more aggressive in cleaning up their loan books by restructuring their acronyms. The American taxpayer should understand that the vagueness of derivative contracts is not a problem to be eliminated, but rather a source of institutional richness."
...and fuck the banks.
Just get right to the point, don't you? My normal response is to argue with any point, but you've about covered it.
now playing, The Ben Bernank in A Few Good Men-
http://www.xtranormal.com/watch/7933323/
http://manifestdeconstruction.blogspot.com/2010/12/reality-american-consumer-is.html
Reality. Consumer loans down 105 billion and counting since the February 2009 peak.
What is the current status of credit in America? This is the current status of credit in America (see below). Don't be a silly, marginal, ranting clown.
Brother, Can You Spare a Dime?
And TTBOMK that fits nicely with ZH's 'main theme', that the deleveraging is happening in the shadow banking system, nothing being done addresses the real problems, and instead of fixing them, the actions taken have merely changed a precipious drop into a long, slow grind to the end.
Capital! ...Capital destruction, that is.
+1
That is the theme of our era: capital destruction, regardless of how many paper scraps they print.
the credit worthy rich will get still richer, by 'borrowing from BANKS, no matter the sacrificial banks themselves i assume HERE that banking and other financial social systems will continue to function, within my remaining lifetime...given ALL that, i will continue to buy/sell stocks, trade FOREX, etc...geting a few 'crumbs off Goldman/Morgan/JP Morgan table scraps' via 'trading'.. 'surviving, making slightly less than i lose'...i will continue to tramp around picking thru their throwaways.... since i see 'confirmed' that the retail-guy can make 'a little' in day/hourly/minute trades...what with the low commisions charged.. my interest is in THOSE companies sufficiently 'credit worthy' to consolidate their embedded short + long term debt into low interest rate LONG LONG term 20-30 year bonds...which means pretty much ONLY the S&P 500 stocks.. the credit worthy rich will get still richer, so grab the brass ring...