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Moody's Warns Of Pain Ahead For Financials, Profitability Concerns Due To Record Charge-Offs
A new report by Moody's "U.S. Bank Asset Quality: Negative Trends Slow Down, But The Pain Isn't Over" has some gloomy observations about the asset quality of the US financial system, and its implications for future charge offs and overall profitability. In estimating total loan charge-offs between 2008 and 2011 Moody's predicts that of the total $536 billion (really $633 billion if unadjusted for purchasing accounting marks), which is equal to 9.7% of all loan outstanding at December 31, 2007, only $240 billion has been charged off, leaving $296 billion still to hit the books. Yet banks have taken loan loss allowances of "only" $188 billion, leaving just over $100 billion unaccounted for. And people wonder why banks are unwilling to lend. Moody's conclusion on what happens as reality catches up with charge offs: "Although banks have provisioned for a substantial amount of their remaining charge-offs, the additional provision required will extend the period that many banks will be unprofitable well into 2010, and will reduce capital levels." Obviously, Moody's estimates do not go past 2011 when many anticipate the next major wave of loan impairments to occur in the form of Option ARM resets and Commercial Real Estate maturities. Furthermore, Moody's does not account for securitized credit card losses, which will also be an area of major pain for the banks in the upcoming years. Just how big the impact of all these will be is still to be determined although it is very likely that the overall impact will impair overall bank capital by well over $100 billion over the next several years.
From the Moody's report:
Moody’s estimates that rated U.S. banks will incur $536 billion of loan losses between 2008 and 2011, equal to 9.7% of loans outstanding at December 31, 2007. We have incorporated this amount into our views of banks’ capital adequacy and into our ratings. This amount has been reduced for the purchase accounting marks taken on residential and commercial mortgage portfolios in recent acquisitions, including JP Morgan’s purchase of Washington Mutual, Wells Fargo’s purchase of Wachovia, Bank of America’s purchases of Countrywide and Merrill Lynch, and PNC’s purchase of National City. On a gross basis (prior to the reduction by the purchase accounting marks), Moody’s loss estimate is $633 billion, or 11.4% of loans outstanding at December 31, 2007. Essentially, we believe charge-offs equal to 1.7% of loans were eliminated through purchase accounting write-downs. Note that these estimates exclude securitized credit cards.
The charts and table below summarize our gross loss estimates in dollar and percentage terms by asset class for all rated U.S. banks (Figures 1 and 2). Each asset class is broken down as follows: charge-offs that have been eliminated through purchase accounting write-downs, 2008 charge-offs, 2009 charge-offs, and the remaining losses that would need to be incurred to reach our full estimate. Rated U.S. banks charged off $88 billion of loans in 2008 and $152 billion in 2009, leaving $296 billion, or 5.3% of loans, to be charged off in 2010 and 2011 to reach our full estimate. Therefore, rated U.S. banks have recognized 45% of our anticipated net charge-offs. On an asset class basis, we believe 42% of residential mortgage losses have been taken versus 30% for CRE.
And despite some minor good news in the trend, the overall patern is still one which should force financial analysts to reevaluate their Strong Buy ratings on most banks:
Although the increase in charge-offs between 2008 and 2009 is substantial, the quarterly charge-off trend moderated at the end of 2009 with aggregate charge-offs actually declining slightly (from $41.3 billion to $40.2 billion) between the third and fourth quarters of 2009. This slow down in net charge-off recognition for rated U.S. banks did not change our forecast of the amount of charge-offs rated U.S. banks will incur, but it has changed our expectations regarding the timing of when these losses will be recognized. Previously, we had anticipated that rated U.S. banks would incur elevated charge-offs through 2010 and return to a more normalized level of charge-offs in 2011. However, we now anticipate that banks will still be grappling with elevated charge-offs through at least the first half of 2011.
The TBTF Big 4 (BofA, Wells, JPM and Citi) comprise the bulk of the charge off risk. The Big have merely gotten Bigger, and now represent an even more concetrated threat to the US economy once true marks are let out of the bag.
Figure 3 summarizes our gross loss estimate in dollar terms for the following bank groups: “Big 4 Banks”, “SCAP Banks – Non Big ”, and “Other Moody’s Rated U.S. Banks” . Our gross loss estimates for the Big 4 Banks, SCAP Banks – Non Big 4, and Other Moody’s Rated U.S. Banks are $447 billion (12.9%), $104 billion (10.4%), and $81 billion (7.5%), respectively. In comparison to our estimate that rated U.S. banks are 45% of the way through their net charge-offs, we believe the Big 4 Banks are 46% of the way through their net charge-offs, while SCAP Banks – Non Big 4 and Other Moody’s Rated U.S. Banks are each 43%.
And here is how many remaining losses at all banks and the Big 4 will still need to be digested.
Full report here.
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Deep Shah.
This is one of the few times that I actually agree with Moody's. See
Reality Check for Bank Investors, Mortgage Investors and Home Buyers
I don't understand. What's this about quality of bank assets? Are there problems in the economy? I think Moody's may have uncovered something here that we all have overlooked.
Is there a Pulitzer prize available for rating agencies?
In the fiction category
These guys have zero credibility. Perhaps they're right in this case (and likely so). But their historical track record isn't worth the paper it's written on.
Should we selectively post the drivel that we agree with? Or just ignore anything these assholes put out? I'm for the latter...
"These guys have zero credibility."
To those not mesmerized by the moving shadows and flashing lights, they indeed have no credibility. But their real purpose in the financial game is not to inform but to obscure. Since they remain an integral part of the game, they still have tremendous credibility to those who wish to believe. They may be changing tunes but not the base message.
Someone ought to tell the idiots who are buying gobs of GS, BAC and C - (WTF - who buys C?)
Tyler...as always, thank you for this information and your vigilance. you guys are financial saints. looking forward to attending the pulitzer prize ceremony some day in the future.
Billion.. Trillion.. Gazillion.. Probabillion.. Zerohillion.. Hedgillion.. Marlillion.. Tylerillion.. Bastardillion.. Epicillion..
The zeroes are running out so why not keep the names coming!
Benillion...Copterillion...LyingSachsofshitillion
LOLillion
Costanza play - Moodys takes a dump on the banks and they ramp the $BKX
Didn't I see this morning that Citi is selling its Commercial RE business for $3.5B and that they recently valued it at $12.5B?
It was on bloomie this morning.
72% loss rate...hmmmm...I wonder if that was in the Moody's formula.
Moodys warns about "protiability" ??
Who's slimier, Howard Atkins or Warren Buffet?
bah hambug!
Curious whether the Japanese bank index performed similarly to what we're seeing now following the influx of government support, i.e., running up to absurd levels while the crisis was acknowledged but still obviously just beginning, or whether what is happening to the prices of financials here is another level of manipulation entirely. I plan on digging around for a chart from early 90s Japan later, but expect the latter.
There is nothing here that more sci-fi accounting fraud and wild central banking gambits can't take care of.
Exactly! As long as nobody looks at the delinquent loans, then they don't really exist, right? - kind of like Schrodinger's cat - think of it as quantum mechanics applied to accounting and balance sheets. Anyway, clearly the market agrees - everybody pile into the financials!
Moodys are miopic optimists.
"With recoveries like this, who needs a recession?"
-- Art Cashin
This type of reporting is useless. There has been a decision to allow banks to openly lie about everything. If the numbers come out "bad" they will not be even a fraction as bad as they actually are. The decision that the economy is improving has been made. Everything else is "malreporting"
You see, the government is never "wrong", the paper merely reported the facts incorrectly. This term is often used in describing newspaper articles that contain references to unpersons, unfulfilled economic projections, or altered government policies.
Bad news (actually, the truth) is "unexpected," good news (usually lies or distorted statistics) causes stocks to "soar."
Welcome to Wonderland.
crystal meth finance as reported by the pusher....another rave is in the making....better dilute that meth with a little hopium....
what a bunch of losers...
The outcome of The Great Bank Robbery will hang on a critical decision: Will deficits matter or not? If we all decide as a world to simultaneously ignore each other's debts (and make unemployment insurance a permanent entitlement), then we can start planning communities with names like Utopia Acres. However this plan has to be agreed to by absolutely all at and at the same time. If any country along the way windds up feeling left out, screwed, cheated or lied to then the entire house of cards will bite the dust. Will the world choose Utopia or Dystopia?The really bright people might just point out that some topia is better than no topia at all.
Wonder what sheeple are doing with their 401ks these days ? I still know some that are steadfastly holding onto their recent gains (hoping for more) - and you knwo what maybe they will be right eh ?
How many days till the end of MBS purchasing and QE altogether? I thought it was happening in March. We've got GDP growth and the jobs problem is also solved. Thank you for saving planet earth GoldmanSachs, now give it back!
I come here for the insight and excellent commentary, but ended up getting some Moody drivel. ZH contest, to describe moody drivel as new sex term... it's like a ...cleveland steamer, dirty sanchez, oh i know, it's when one of Robo's ladies goes down on you, only to tell you your "capital requirement" is too low for her mood & she "charges off"?
Off topic, Deadhead, did you see the mouth piece Liesman strumming his classical, playing Uncle John's w/ Bobby on Fast Money? Just caught the last 2 seconds a few days ago.
protiability?
Profitability? Probability? Probe-ability?
Clever propagandistic obfuscation trick. An example of "reasonable pessimism" interjected to diffuse, by way of acknowledging, something too obvious (to those paying attention) to ignore.
METAPHOR:
There's signs on shore of a storm rolling in. Those who have access to the data can reasonable deduce that it could be a category 5 brewing. But, a report is released that warns of possible flooding and advises stowing away the lawn furniture. Thereby convincing most to feel content to batten down, fill the bathtub with water and stock up on ice and snacks. When, in reality, they should be BOARDING UP EVERY WINDOW AND DOOR AND HEADING FOR THE HILLS!!!
If banks charge off 1 gazillion dollars, Ben will give them 5 gazillion. The profit is guaranteed.
Nationalize those fuckers. Get it over with.
Post of the day, and must read summary of where we are:
http://www.nakedcapitalism.com/2010/03/the-empire-continues-to-strike-back-team-obama-propaganda-campaign-reaches-fever-pitch.html
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