Banks Extend and Pretend

The U.S. banking crisis isn’t over yet, a Bloomberg study implicitly declared today. According to Bloomie, over 150 publicly traded U.S. banks have 5% or more of their total holdings in nonperforming loans.

“At a 3% level, I’d be concerned that there’s some underlying issue, and if they’re at 5%, chances are regulators have them classified as being in unsafe and unsound condition,” Walter Mix, former commissioner of the California Department of Financial Institutions, told Bloomberg.

If the paper is right, those 150-plus banks are sitting on $193 billion in deposits. If just 7% of them fail, it’ll wipe out the FDIC’s deposit insurance fund. Also, the 19 stress-tested, too-big-to-fail banks aren’t included on the list.

305 financial institutions are currently on the FDIC’s “problem list.”

“Right now, the market has priced bank stocks for perfection, but the earnings outlook remains bleak,” Dan Amoss tells us. “Investors are excited about the wide yield curve that’s enabling banks to borrow at ultra-low rates and lend at much higher rates. But starting a few years ago — and going forward a few more years — losses on loans made during the bubble will matter more than the wide yield curve. More bank failures, capital shortfalls, dividend cuts and shareholder dilution are in the cards for most bank stock fans.

“For example, the banks are delaying recognition of losses on underwater mortgages, precisely because they have the green light from regulators to try to ‘earn their way out’ of their credit losses over time (i.e., ration credit for borrowers at high interest rates, stiff savers with low CD rates and pocket the spread).

“Trouble with this scenario is unless the auditors signing off on bank balance sheets want to risk lawsuits, they will FORCE banks to disclose delinquencies in at least the footnotes in their 10-Qs. A rules-based system is still at the core of bank accounting, meaning that at the very least, banks will have to disclose delinquencies, regardless of whether they plan to pray for recovery of loan value and restoration of principal and interest payments or write it off entirely.

“Because bank stocks usually act as a canary in the coal mine, a continued bear market in banks translates into a continued bear market in most other stocks. The evidence tells me we’re experiencing a bear market rally, not a new bull market. The promoters of the idea that this is a new bull market are ignoring one of the worst enemies of stocks: uncertainty. Right now, especially considering aggressive government policies, uncertainty about the future business environment is very high.”

The Daily Reckoning