FDIC Warns of More Trouble Ahead for Banks

A top government banks regulator warned Wednesday of rising risks for regional banks, though analysts said some of the agency's concerns have already been accounted for by a tumultuous stock market.

As the record economic expansion runs out of steam, the Federal Deposit Insurance Corporation said in a report that warning signs are becoming more visible at a number of banks. The report said banks would likely be hurt by deteriorating credit quality, shrinking margins and risky assets, even as the agency sought to emphasize the view that the macroeconomic environment appears healthy.

But the FDIC warned that years of record bank and thrift profits and strong asset quality may not be sustainable, especially against the backdrop of aggressive risk.

"The losses posted recently by several large institutions are striking examples of increased appetite for risk resulting in significant financial loss during a period of strong economic growth," according to the FDIC. Indeed news of substantial loan writedowns at banks including Bank of America (BAC), Wachovia (WB) and Bank One (ONE) are the result of relaxed lending standards in recent years.

"This highlights some of the concerns bank analysts have had for a while," says Brock Vandervliet, banks analyst at Lehman Brothers. Noting the FDIC's discussion of "lackluster core deposit growth," Vandervliet says banks are having difficulty raising deposits and pricing loans accordingly because of increased competition. "It's a challenge the banking industry continues to wrestle with," he says.

But in some respects, analysts said the report is behind the curve. For instance, the report includes "heightened interest rate risk" as one of its concerns, a factor that has recently become a nonissue, particularly in light of the Fed's announcement yesterday that it would lean toward easing interest rates soon. "I don't see the point about interest rate risk. This is kind of late," says Chris Marinac, banks analyst at Robinson Humphrey.

The report also laid out separate issues for eight regions. Vandervliet notes its focus on rapid growth in commerical real estate in San Francisco and the prediction that overbuilding could be a result of weakening demand. "Some of the correction that we've already seen in the Nasdaq Composite Index and the tech stocks" has already flowed through and pummeled the sector, he says.

Marinanc also took issue with the report's cautious view on real estate exposure, saying "taking additional risks for real estate does not bother me. If anything, if you're picking the right submarkets" it can be profitable. Marinac says the FDIC is "guilty of looking at a whole city" rather than seeing it as a compilation of several markets.

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