Defaults Slow, but Don't Call It a Comeback

Loan delinquencies declined in the second quarter, but the temporary aid provided by government stimulus checks means that the credit crunch could be far from over, analysts say.

Several analysts this week have crunched the numbers on the second-quarter loan landscape and found some encouraging trends. A sample of second-quarter delinquency trends at 47 large and mid-size banking institutions shows the median delinquency ratio to total loans was 1.07%, down slightly from 1.10% in the first quarter, according to a report last week by boutique investment firm Stifel Nicolaus.

Compared another way, delinquencies on average rose only 2 basis points to 1.20% from the quarter before, so says the report.

"Any sign that credit quality deterioration might be decelerating is welcomed news for a battered industry," writes Stifel Nicolaus analyst Christopher Mutascio. "And many believe that the early stage delinquency levels could be one of the better leading indicators in trying to determine when the overall turn in credit quality might occur."

However "we are skeptical in putting too much emphasis on the second quarter 2008 data because there is a good chance that the results have been positively skewed by tax rebates as part of the economic stimulus plans," he writes.

Huntington Bancshares(HBAN Quote), KeyCorp(KEY Quote), Colonial BancGroup(CNB Quote) and Zions Bancorp(ZION Quote) experienced the largest improvement in early-stage delinquencies, the report says. On the flip side, Wachovia(WB Quote), First Horizon(FHN Quote) and East West Bancorp(EWBC Quote) were among those banks with the had the worst deterioration, according to Stifel Nicolaus. Wachovia noted "anomalies" in the spike of its commercial and industrial delinquency rates, which negatively impacted overall past due levels, according to the Stifel note.