Thursday, May 28, 2009

Understanding MN bank reports 

The FDIC reported out first quarter bank results, including these for Minnesota. Twin Cities Business Journal is reporting a drop in profits of 65% over first quarter 2008, but this should be taken with some caution. When banks report income, they must include in their figures any charge-offs they take for anticipated loan losses.

Return on assets, though, fell in Minnesota to 0.56% from 1.18% a year ago. Yields on loans are falling faster than their cost of funds, which is squeezing profits somewhat, and then you add to it larger charge-offs (for the uninitiated: a bank puts money aside in anticipation of losses on loans that are deteriorating; it then draws on that fund if the loan defaults as anticipated.)
The quality of loans held by Minnesota�s banks continued to decline. Net charge-offs as a percentage of total loans and leases were .94 percent, compared to .74 percent in the fourth quarter of 2008 and .48 percent in the first quarter of last year. Noncurrent loans and loans as a percentage of total loans and leases was nearly 3 percent, compared to 2.6 percent in the fourth quarter of 2008 and 1.5 percent in the first quarter of last year.
Total loans of Minnesota banks fell from $80 billion a year ago to $54 billion now (deposits fell much less, from $62b to $56b.) The share of assets that were mortgages fell from 42% to 21% in the period. Equity capital has fallen from $8.2 to $7.1 billion in the same time.

This isn't bad, and it certainly isn't WaMu bad. But it isn't good for Minnesota when loans at its banks decline by a third. (That's different than saying credit in Minnesota declined by a third -- many of us get credit from institutions in other states.)

What is interesting about this period is that we have had only 8 commercial banks close, so many banks are restructuring while their leverage ratios have not moved very much. It appears that, as much as anything, the banks are going through this process in an orderly fashion. Bloomberg reports as well that banks' riskiness is now being better perceived by other market participants, so that weak banks are being charged higher rates than healthier ones. This is improving credit conditions:
U.S. companies have sold a record $600 billion of bonds so far this year, up from about $500 billion in the same period of 2007, according to data compiled by Bloomberg. Rates on 30-year fixed mortgages are about 1.8 percentage points more than 10- year Treasuries, down from 3.27 percentage points in December. ...

While financial markets are improving, more than 60 U.S. financial institutions have collapsed over the past two years, according to Bloomberg data. In its latest quarterly survey of senior loan officers, the Fed found that more than 70 percent of respondents said bad loans will rise should the economy progress �in line with consensus forecasts.�
And if all this talk about green shoots doesn't pan out... perish the thought.

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