Monday, February 9, 2009

“Bank Failures May Reach 1,000” – RBC Says…

Analyst upped report from 300 possible failures to 1,000…

Bank Failures May Reach 1,000 on Bad Loans, RBC Says

By David Mildenberg and Margaret Chadbourn

Feb. 9 (Bloomberg) -- As many as 1,000 U.S. banks may fail in the next three to five years, almost double the one-year tally at the height of the saving-and-loan collapse, as losses mount on commercial real-estate loans, RBC Capital Markets analysts said.

Most of the failures will probably occur at banks with less than $2 billion in assets as their commercial customers default, said Gerard Cassidy, an analyst at RBC, in an interview today.

“There are billions of dollars of losses embedded in the system, and the system has to flush them out,” Cassidy said. “The people that are going to take the losses are the taxpayers and bank stockholders, and if regulators say there won’t be much loss to taxpayers, they will be lying.”

Regulators are taking steps to help lenders avoid losses as President Barack Obama’s administration readies a rescue package that may include guarantees for toxic assets, according to people familiar with the plan. The Federal Deposit Insurance Corp. closed nine banks so far this year after shutting 25 in 2008 and identified 171 “problem” institutions as of the third quarter.

The FDIC has already raised the estimate for the cost of U.S. bank failures through 2013 after fourth-quarter financial reports from banks signaled possible additional losses to the deposit insurance fund. The agency said failures through 2013 may cost more than the $40 billion estimated in October.

The U.S. seized 534 lenders in 1989, including 327 saving- and-loan associations, during the peak of a crisis among thrift institutions, FDIC data showed.

‘Nowhere Near the End’
The FDIC on Dec. 16 doubled premiums it charges banks to replenish its reserves, which totaled $34.6 billion as of the third quarter. The agency and Congress are taking steps to offer safeguards for the banking industry, including more than tripling the FDIC’s borrowing authority from the Treasury Department, to $100 billion, to support consumers against bank failures.

“The sooner the bank regulators can shut down the troubled banks, the faster the industry will get back on its feet,” Cassidy said in the report. “We are nowhere near the end of this down leg in the current credit cycle.”

Cassidy had previously said as many as 300 banks would fail in the next three years. RBC bases its estimates on discussions with industry experts and by calculating the loans for which banks aren’t receiving interest as a percentage of tangible capital and reserves for losses, Cassidy said. RBC calls it the “Texas ratio” because it was crafted during the state’s 1980s bank crisis. RBS said lenders that exceed 100 percent are at risk of collapse.

Sterling, Colonial
While the RBC benchmark tops 100 percent for dozens of small U.S. banks, RBC Centura’s research shows two of the 50 largest banks have Texas ratios in excess of 50 percent. Sterling Financial Corp. of Spokane, Washington, is 54 percent, and Colonial BancGroup Inc. of Montgomery, Alabama, is 53.4 percent, RBC said.

Sterling in December sold preferred shares to raise $303 million from the U.S. Troubled Assets Relief Program and ended 2008 with liquidity that topped $3 billion, Chief Executive Officer Harold Gilkey said on Jan. 28.

Colonial is negotiating with several investors to raise $300 million to qualify for $550 million from the Treasury’s program, CEO Robert Lowder said on Jan. 27.

Bank of America Corp., the largest U.S. bank, has a Texas ratio of 21.6 percent, compared with No. 2 JPMorgan Chase & Co.’s 5.6 percent and No. 3 Citigroup Inc.’s 18.4 percent. The U.S. is backing $301 billion of Citigroup securities and $118 billion at Bank of America, and injected $45 billion into each lender.

“Many of Bank of America and Citigroup’s problems stem from securities portfolios that have run into trouble when they are marked to market,” Cassidy said. “The commercial credit problems of the big banks are just beginning and we expect the ratio to rise steadily this year.”

Banks charged off $3.9 billion of real-estate construction and development loans in the third quarter, a more than eightfold increase from a year earlier, according to the FDIC. The agency hasn’t reported data from the fourth quarter.

It’s been piecemeal by the FDIC so far, but they had better keep building staff and their balance sheet – which, by the way, is actually non-existent other than an accounting entry. It seems that the money the FDIC takes in gets spent in the general budget and is actually NOT held in reserve… Do you think that will catch up to them one day soon?

Many smaller banks are at risk due to their commercial real estate deals and the financing of developers and contractors. As the real estate market grinds to a haul, they have been reticent to foreclose or to call in loans as they know the ability to repay does not exist. The banking crisis is far from over, despite anything Geithner may attempt tomorrow or any other day for that matter.