More Pain Ahead for US Banks

by Dan Amoss.

Friday’s edition of The Wall Street Journal picks up on the theme of the long road of pain ahead for bank shareholders in the US. In ‘Banks on Sick List Top 400,’ the WSJ details several ugly highlights from the latest FDIC Quarterly Banking Profile, published last Thursday.

Here are a few:

1. The FDIC’s Deposit Insurance Fund is now promising to insure $6.2 trillion in deposits with just $10.4 billion in reserves. Expect to see another “special assessment” cutting a few billion dollars out of bank earnings later this year.

2. Credit card losses are at a record: 9.95%

3. 416 banks, or 5% of the nation’s banks, are on the ‘problem’ list.

4. FDIC-insured banks are sitting on $332 billion in loans more than 90 days past due, up from $290 billion in the first quarter.

5. Nonperforming loans now make up 2.77% of the entire banking industry’s assets. This is up from 1.4% in June 2008 and 0.47% in June 2006. As these loans get ‘worked out’ in today’s credit environment, the market will start to realize how severe net charge-offs will be.

In this new report, the FDIC published updated figures for the combined noncurrent loans and loan loss allowance at all FDIC-insured institutions. Here is an updated version of the chart we published in the Aug. 14 alert. The new figures – the moves from December 2008 to June 2009 – are highlighted in the dotted lines at the far right of this chart:

US Banks Facing Strong Credit Headwind

You can see how problem loans are increasing at a much faster rate than the rate at which the banking industry is adding to its loss allowance. This means that published capital ratios are misleadingly high.

Dan Amoss, CFA, is a student of the Austrian school of economics, a discipline that he uses to identify imbalances in specific sectors of the market. He tracks aggressive accounting and other red flags that the market typically misses. Amoss is a Maryland native, a graduate of Loyola University Maryland, and earned his CFA charter in 2005. In spring 2008, he recommended Lehman Brothers puts, advising readers to hold the position as the stock fell from $45 to $12. Amoss is managing editor of the Strategic Short Report.

  • jason

    Does this mean that the stress tests done a couple of months ago weren’t accurate?

  • tony bonn

    i was going to make the exact same comment….

  • Hank

    I read a headline that said, “Bank failures not nearly as numerous as S&L Crisis” Gee, I wonder why? All those little banks became BIG banks and now the big banks are crashing down under the same cheap money policy and ridiculous lending practices.

  • sierra

    The so-called “stress tests” you may remember were designed by the banks not by outsiders. (Or even shareholders)
    That should have given anyone a clue that those tests were bogus from the beginning.

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