Steady Drop in Problem Bank List - Analyst Blog

By
A A A

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
 
To read this article on Zacks.com click here.
 
Zacks Investment Research



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: BBT , GS , JPM , WFC

Zacks.com

Zacks.com

More from Zacks.com:

Related Videos

Stocks

Referenced

100%
64%
75%
88%

Most Active by Volume

86,627,350
  • $61.80 ▼ 3.33%
58,636,005
  • $15.44 ▼ 1.03%
43,254,709
  • $64.8725 ▼ 0.15%
39,355,269
  • $3.38 ▲ 0.90%
39,064,711
  • $4.29 ▲ 1.42%
38,037,134
  • $95.035 ▼ 0.37%
36,100,193
  • $94.66 ▼ 0.32%
32,857,379
  • $26.20 ▼ 0.46%
As of 7/10/2014, 04:04 PM