The FDIC’s Quarterly Banking Profile: Q2 2008

Let’s review some of the data points from the FDIC’s latest quarterly banking profile for Q2 of 2008:

Net Income: declined by 86.5%, dropping from 31.8 billion last year to 5 billion this year.

Loan Loss Provisions increased by 440 % jumping up from 11.4 billion last year to $50.2 billion this year; furthermore it’s worth nothing that banking earnings from Q2 of last year noted (in many cases) double to triple digit % increases in loan loss provisions when compared to 2006.

Return on Assets (ROA) declined to 0.15% from 1.23% in Q2 of ‘07, at institutions with assets of greater than $1 billion ROA declined from 1.23% to 0.10%, at institutions with assets less than $1 billion the decline was from 1.10% to 0.57%.

Net Operating Revenue was only 0.5% $772 million) above last year’s level, however it’s worth nothing that this year’s revenue includes $7.9 billion of gains from loss related tax treatment.

Net Charge-offs increased by from $8.9 billion to $26.9 billion; looking at specific categories the increase was 821.9% for residential mortgages, 1,226% for commercial real estate, 632.7% for home equity loans, 47.4% for credit cards and 70.3% for other types of loans to individual consumers.

Non-current loans (90 or more days past due) increased for the 9th consecutive quarter by 19.6% over the course of Q2, with increases across every major loan category.

Noncurrent loans are continuing to outpace loan-loss reserves , with the overall coverage falling to a 15 year low of 88.5 cents for every $1.00 in non-current loans.

117 Banks are on the troubled list up from 90 in Q1; nine banks have failed so far this year compared to three last year. Historically 13% of the banks on the list will wind up failing. It’s worth noting that IndyMac wasn’t on the troubled banking list before it went bust.

Another way to look at some of the numbers above is to say that in Q2 of 2007 FDIC insured institutions earned a total of $31.8 billion, had a total loan loss provision of $11.4 billion and net charge-offs of $8.9 billion, and in the most recent quarter the numbers were $5 billion, $50.2 billion and $26.9 billion respectively.

Ouch.

I’ve always liked the FDIC’s banking profiles because they’re more direct and honest than the spin you get from the bank’s themselves, however it’s still an aggregate measure of health more so than a tool you can use to evaluate an individual investment.

When I read this, the first thing I thought about where the multiple pronouncements of a bottom in banking beginning around this time last year and continuing on through the fall, in nearly every case they were based on the idea of “things are so bad right now that they cannot get any worse”.

After looking at the above, it is fairly obvious that things did (and could) indeed get worse. Instead of trying to call a bottom, it is probably best to look at metrics like the above and stack rank potential banking investments based on their performance over the past 18 months, followed by watching other institutions for multi-quarter signs of improvements along the same metrics. I.e. instead of trying to call a bottom try to identify the strongest institutions, and the ones that are starting to turn the corner.

“Things are so bad that this must be the bottom” isn’t a theory I would want to gamble my money on, I’d rather invest in strength in a bad environment and/or legitimate signs of improvement spanning multiple quarters.

You can read the FDIC’s quarterly banking profile in full (opens PDF file) here, see video of the news conference on the subject here, read a blog post I wrote that discussed aspects of Q2 2007’s banking profile here , and read a wrap-up of the banking profile from the AP here.

Sources:

The FDIC: “Quarterly Banking Profile Q2, 2008″ — August 26, 2008.

The Associated Press (via Yahoo news): “FDIC: 117 troubled banks, highest level since 2003″ — Marcy Gordon, August 26, 2008.

Reuters (via Yahoo News): “FDIC may borrow money from Treasury: report” — Sweta Singh, August 27, 2008.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

Posted in Categories: Contributor, Economy, External Research.

Subscribe by RSS Subscribe by Email