Is the banking industry gradually coming out of the woods? Would
it be right to say that there has been no improvement? The steady
decline in Federal Deposit Insurance Corporation's (FDIC) list of
problem banks is a strong positive signal for the industry and the
country as a whole.
The number of banks on FDIC's list of problem institutions saw a
sharp decline for the third straight quarter to 813 in the
October-December period from 844 in the preceding sequential
period, federal regulators reported last week. As of the end of
2010, there were 884 banks in the problem list.
Things looked a lot brighter in the fourth quarter given the
drop in the problem list and strong growth in profit earned by FDIC
insured banks for the 10
th
quarter in a row.
The problem list includes banks that face imminent failure due
to low capital support, though some may survive and come out of the
crisis. As of now, only less than a quarter of the banks on FDIC's
problem list have actually failed.
How Big are the Problem Banks?
Most of the problem banks are small institutions. Total assets
of these banks decreased to $319 billion at the end of the fourth
quarter from $339 billion at the end of the previous quarter. This
nevertheless represents a phenomenal 53-fold jump from $6 billion
in assets of 50 problem institutions in 2006.
The Fail Trail
There have been 12 bank failures so far this year, preceded by
92 in 2011, 157 in 2010, 140 in 2009 and 25 in 2008. On a
cautionary note, increasing loan losses on commercial real estate
could trigger many more bank failures in the upcoming years.
However, considering the moderate pace of bank failures, the number
in 2012 is not expected to exceed the 2011 tally.
While the financials of a few large banks continue to stabilize
on the back of an economic recovery, the industry is still on shaky
ground. The sector presents a picture similar to that of 2011, with
nagging issues like depressed home prices along with still-high
loan defaults and unemployment levels troubling such
institutions.
The lingering economic uncertainty and its effects also weigh on
many banks. The need to absorb bad loans offered during the credit
explosion has made these banks susceptible to severe problems.
What's the FDIC's Role?
The FDIC insures deposits at 7,359 banks and savings
associations in the nation as well as promotes the safety and
soundness of these institutions by addressing risks associated with
them. The number is, however, down from 7,437 in the prior
quarter.
Now the problem banks represent about 11.0% of the total number
of banks and savings associations covered by the FDIC. When a bank
fails, the agency reimburses customer deposits of up to $250,000
per account.
Shape
of Deposit Insurance Fund
Though the FDIC has managed to shore up its deposit insurance
fund (DIF) over the last few quarters, the ongoing bank failures
have kept it under pressure. However, at the end of the fourth
quarter, the fund was in surplus for the third straight
quarter.
Also, the balance increased to $9.2 billion from $7.8 billion at
the end of the prior quarter. The improvement in fund balance was
aided by a moderate pace of bank failures and assessment
revenue.
Improving Profit Trend
Besides the heartening decline in the list of problem
institutions, the 10th straight quarter of consolidated profit from
FDIC-insured banks is significantly impressive. The consolidated
fourth quarter 2011 profit of FDIC-insured banks came in at $26.3
billion, up 22.9% year over year.
The increase was primarily driven by lower loan loss provisions,
similar to the past nine quarters. In the fourth quarter, loan loss
provisions were $19.5 billion, down 40.4% from $32.7 billion in the
prior-year quarter.
Only 18.9% of all institutions reported net losses during the
quarter, down from 27.1% in the year-ago quarter. Also, about 63.0%
institutions witnessed a year-over-year profit increase.
However, in terms of numbers, only a handful of banks, with
assets exceeding $10 billion, generated the major portion of the
consolidated profit during the quarter. These are primarily the
large banks like
JPMorgan Chase & Co.
(
JPM
),
Wells Fargo & Co.
(
WFC
),
The Goldman Sachs Group Inc.
(
GS
) and
BB&T Corporation
(
BBT
).
Are Banks Ready to Support Economy?
Banks are actively responding to every legal and regulatory
pressure. In fact, this promptness has positioned the banks well to
encounter impending challenges.
As the sector is undergoing a radical structural change, it is
expected to witness headwinds in the near to mid term. But entering
the new capital regime will significantly improve the industry's
long-term stability and security.
According to FDIC's acting chairman Martin J. Gruenberg, the
industry is now in a much better position to support the economic
stability. But we don't expect the potency of the sector to return
to its pre-recession peak anytime soon. The economic intricacy may
even result in further disappointments in the coming quarters.
However, it would be wrong to say that there has been no
improvement. At least, the data from FDIC does not prove so. The
industry is gradually moving toward regaining investor
confidence.
BB&T CORP (
BBT
): Free Stock Analysis Report
GOLDMAN SACHS (
GS
): Free Stock Analysis Report
JPMORGAN CHASE (
JPM
): Free Stock Analysis Report
WELLS FARGO-NEW (
WFC
): Free Stock Analysis Report
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