Banks Post Worst Earnings in 17 Years

As the mortgage crisis unfolds, many of the largest banks and thrifts have been making ever-higher provisions for loan-loss reserves.

While some of the largest banks continued making significant quarterly writedowns of mortgage-related securities, the elevated reserving activity in the fourth quarter caused the industry to post its worst quarterly earnings performance since the fourth quarter of 1991.

U.S. banks and savings and loans reported combined net income of $5.1 billion for the fourth quarter of 2007, or an annualized return on average assets of just 0.15%, and a return on average equity of 1.46%. This compares with quarterly net income of $40.3 billion in the fourth quarter of 2006, with average returns on assets and equity of 1.30% and 12.53%.

Many institutions, of course, continued to weather the storm without much ill effects. Still, there's a clear trend in the ratings. TheStreet.com Ratings assigned financial strength ratings of B (good financial strength) or above to 51% of institutions, down from 53% a year ago. Institutions receiving D (weak financial strength) ratings or lower comprised 17% of all institutions, compared with 15% a year earlier. (The ratings are based on data from the latest available statutory regulatory filings.)

Another sign of weakness was that 89 banks and thrifts were considered less than well capitalized per regulatory guidelines as of Dec. 31, 2007, compared with 59 institutions at the end of 2006.

We spoke with Philip van Doorn, senior bank analyst for TheStreet.com Ratings, about the fourth-quarter results.

Which institutions contributed the most to the earnings fallout?

The elevated provisions for loan losses at the nation's largest banks and thrifts were the primary factor in the paltry earnings results for the industry.

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Looking at the largest 20 institutions, six took losses during the quarter, including Citibank NA, (held by Citigroup (C)) with a loss of $4.5 billion and Washington Mutual Bank (held by Washington Mutual(WM)), with a loss of $1.8 billion. A total of 15 institutions reported lower earnings than in the previous quarter.

Which of the largest 20 concern you the most?

Let's take a look at asset quality and capital exposure for the group.

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Of the largest 20 institutions, the ones with the worst asset quality and greatest exposure of capital and reserves to problem loans were Washington Mutual Bank, National City Bank (held by National City Corp. (NCC) and Countrywide Bank (held by Countrywide Financial Corp. (CFC)).

As we have followed the mortgage crisis over the past year, these three have always stood out among the largest 20 institutions, with major loan quality concerns. All three continued to see their nonperforming loans increase significantly, with Countrywide's problem loans nearly doubling during the quarter. Of course, Countrywide has a deal in place to be acquired by Bank of America Corp. (BAC).

When J.P. Morgan Chase (JPM) announced its initial deal to acquire Bear Stearns (BSC) for a measly $2 a share, some speculated that Bank of America might walk away from its deal to acquire Countrywide. CEO Ken Lewis has repeatedly stated that BofA won't walk away from the deal.