FDIC Data on Bank of America and Wells Fargo Show Banks Took Write-Downs; Here's Strategy

Book Profits on Bank of America and Wells Fargo up to weekly risky levels at $36.30 and $55.81, respectively.
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The Federal Deposit Insurance Corp.'s Quarterly Banking Profile for the third quarter shows that Bank of America (BAC) - Get Report and Wells Fargo (WFC) - Get Report had significant write-downs of bad loans in Q3.

I did not see any Wall Street bank analysts discuss this in the media, but it was discussed during the news conference associated with the report of this data by the agency.

My call is to book profits on these big banks up to their risky levels for this week at $36.30 for BAC and $55.81 for WFC.

Bank of America closed Friday at $35.35, up 44% year to date and in bull-market territory 56% above its Dec. 24, 2018, low of $22.66. The stock set its 2019 high of $35.72 on Dec. 27.

Wells Fargo closed Friday at $53.92, up 17% year to date and in bull-market territory 25% above its Dec. 26, 2018, low of $43.02. The stock set its 2019 high of $54.75 on Nov. 29.

Comments by FDIC Chair Jelena McWilliams

“Overall, the banking industry reported positive results, despite non-recurring events at three large institutions," FDIC Chair Jelena McWilliams said. 

"While these events resulted in a modest decline in aggregate quarterly net income, the industry reported loan growth and the number of problem banks remained low.

“With two reductions in short-term rates and a flat yield curve this quarter, challenges in lending and funding continued. The competition to attract and maintain loan customers and depositors remains strong; consequently, banks need to maintain rigorous underwriting standards and prudent risk management.

“Awareness of interest rate, liquidity, and credit risks at this stage of the economic cycle will position banks to be more resilient in maintaining lending through the economic cycle.”

These comments are clear warnings that the underlying structure in the banking system is not as solid as Wall Street predicts. 

My analysis of the data suggests that banks have not fully recovered from the Great Recession of 2008.

  1. Total real estate lending is 1.5% below the level recorded at the end of 2007.
  2. Construction and development loans are down 4.2% from the of 2007 and sales of new homes are said to be an economic positive.
  3. Home-equity loans have been declining every quarter since the end of 2007 despite the reinflated home price bubble.
  4. Reserves for losses are up 23% since the end of 2007 while noncurrent Loans are down 13.1%. This is a clear sign that banks see problems down the road.
  5. Not shown in my spreadsheet is the fact that corporate debt at $7.7 trillion needs to be refinanced over the next two years or so. These are the funds corporations raised at low interest rates for share buybacks and increased dividends.

Details of the FDIC Quarterly Banking Profile

The banking system is shrinking. Since the end of 2007, the number of banks is down 38.4% to 5,256 and employment is down 6.7% to 2.066 million jobs.

Here’s a Scorecard of the Key Metrics I Track

Key Data From the FDIC

Key Data From the FDIC

Total Assets at $18.5 trillion are up 41.7% since the end of 2007.

Residential Mortgages (1- to 4-family structures) rose to $2.182 trillion in the third quarter, 2.8% below the pace at the end of 2007.

Nonfarm / Nonresidential Real Estate Loans have expanded to a record $1.491 trillion in the third quarter, up 54% since the end of 2007. The banking system now faces the risk of loan defaults related to closing retail stores and malls.

Construction and Development Loans represent loans to community developers and home builders to finance planned communities. This was the Achilles heel for community banks and the reason that the FDIC seized more than 500 banks through its bank-failure process since the end of 2007. C&D loans in Q3 edged up to $359.8 billion from Q2 but were down 42.8% since the end of 2007.

Home Equity Loans represent second-lien loans to homeowners who borrow against the equity of their homes. Regional banks typically offer home-equity lines of credit, but these loans continue to decline quarter over quarter despite the dramatic rise in home prices. Heloc lending declined 2.4% in Q3 from Q2, to $349.8 billion, and is down 42.4% since the end of 2007.

Total Real Estate Loans rose to $4.38 trillion in the third quarter from Q2 but are down 1.5% since the end of 2007. Clearly, real estate lending has not been a factor in economic growth since the end of the Great Recession.

Deposit Insurance Fund represents the dollars available to protect insured deposits. These monies are funded by all FDIC-insured institutions via annual assessments, with the largest banks paying the largest amounts. The third-quarter DIF balance is $106.9 billion, having more than doubled since the end of 2007.

Insured Deposits rose to $7.7 trillion in the third quarter and are up 79.4% since the end of 2007 as savers sought the deposit-insurance guarantee of $250,000 available at each bank where a saver has insured deposits.

Reserves for Losses rose to $125.2 billion in the third quarter. That's 23% above the level shown at the end of 2007. This is a sign of caution in the banking system.

Noncurrent Loans slipped to $95.5 billion in the third quarter, 31.1% below the level at the end of 2007.

The Weekly Chart for Bank of America

Weekly Chart For Bank Of America

Weekly Chart For Bank Of America

Courtesy of Refinitiv XENITH

The weekly chart for Bank of America is positive but overbought, with the stock above its five-week modified moving average at $33.94. 

The 200-week simple moving average, or reversion to the mean, is $25.43, which is the downside risk in 2020. 

The 12x3x3 weekly slow stochastic reading is 94.8, well above the overbought threshold of 80 and above 90 as the stock is in an inflating parabolic bubble. 

This week’s risky level is $36.30.

The Weekly Chart for Wells Fargo

Weekly Chart For Wells Fargo

Weekly Chart For Wells Fargo

Courtesy of Refinitiv XENITH

The weekly chart for Wells Fargo is positive but overbought, with the stock above its five-week modified moving average at $53.38. 

The 200-week simple moving average, or reversion to the mean, is $52.18. 

The 12x3x3 weekly slow stochastic reading is 88.24, well above the overbought threshold of 80. Back at the Nov. 29 high of $54.75, this reading was 94.83, as the stock was in an inflating parabolic bubble. 

This week’s risky level is $55.81.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the past 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.

Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00. So I call that an inflating parabolic bubble, as a bubble always pops. I also call a reading below 10.00 too cheap to ignore.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.