Federal Deposit Insurance Corporation data sheds light on a technical analysis of the four "too big to fail" money center banks and five of the largest super regional banks. More detailed stories with charts and key levels will follow later on Tuesday -- stay tuned! But first, read the data here.
FDIC data for the third quarter continues to show rising year-over-year revenue and net income, but also continued challenges. While interest rates may be rising so far in the fourth quarter, persistently low interest rates remain an issue.
Low interest rates have caused many banks to reach for yield, and they have invested in higher-risk assets and extended asset maturities. Most Wall Street analysts cite the textbook notion that higher rates are bullish for banks, but they forget that when yields rise, yield spreads widen for non-U.S. backed investments. This will lead to mark-to-market losses in securities "held for trading."
A current concern of the FDIC is loans to areas of the country tied to the oil and gas industry. Struggling energy prices has resulted in a modest increase in loan-loss provisions for the third quarter in a row.
While the number of problem banks declined, the number of FDIC-insured financial institutions fell to 5,980. At the end of 2007, there were 8,533 banks, with only 76 on the problem list-- vs. 132 today. The number of employees in the banking system increased in the second quarter but declined again in the third quarter. Today, the banking industry employs 2.04 million people, down from 2.21 million at the end of 2007.
Here's a portion of the FDIC Quarterly Banking Profile for the third quarter, which should be considered the balance sheet for the U.S. economy.
Total Assets rose to $16.77 trillion in the third quarter, up a solid 28.6% since the end of end of 2007, despite the Great Credit Crunch. The four "too big to fail" money center banks -- JP Morgan Chase (JPM) - Get Report , Wells Fargo (WFC) - Get Report , Bank of America (BAC) - Get Report and Citigroup (C) - Get Report -- still hold more than 42% of all assets, which remains a regulatory headache.
Residential Mortgages (one-to-four family structures) represent the mortgage loans on the books of U.S. banks. Banks continue to increase their mortgage portfolios. Production rose to $1.99 trillion in the third quarter, but is 11.4% below the pace of the fourth quarter of 2007.
With regulators determining the future of Fannie Mae and Freddie Mac, the big banks, including the super regionals, need to pick up the pace of mortgage originations to help keep the housing market stable.
Nonfarm / Nonresidential Real Estate Loans represent lending to construction companies and homebuilders to build office buildings, strip malls, apartment buildings and condos, which have been a major focus for community banks. This category of real estate lending expanded throughout the Great Credit Crunch and is now at a record $1.3 trillion, up 34.3% above the level of the fourth quarter of 2007. This is a potential problem as online shopping reduces traffic at U.S. malls. This is a key metric to keep an eye on during the 2016 holiday shopping season. Keep in mind that about 1,500 community and regional banks remain overexposed to CRE lending. And 500 of these banks are publicly traded.
Construction & Development Loans represent loans to community developers and homebuilders to finance planned communities. This was the Achilles heel for community banks and the major reason why more than 500 banks were seized by the FDIC bank failure process since the end of 2007.
The recovery in the real estate loan category has been solid in recent quarters. C&D loans were up 3% in the third quarter sequentially to $303 billion, but are still 51.8% below the level at end of 2007. C&D loans bottomed at roughly $200 billion at the housing market bottom, and many are legacy bad loans, still holding a chokehold on some 362 community banks, of which 77 are publicly traded.
Home Equity Loans represents second lien loans to homeowners who borrow against the equity of their homes. Many of these loans failed as homeowners became underwater on their original mortgages.
Regional banks typically offer home equity loans of credit, but these loans continue to decline quarter over quarter, despite the rise in home prices. HELOC lending declined 1.8% in the third quarter sequentially, and is down 26.8% since the end of 2007.
This loan category should be making a comeback, but it's not. The question is whether banks want to lend in this loan category, or whether homeowners are not prepared for increased monthly mortgage payments. Or, could it be that regulatory paperwork is just too restrictive? Time will tell.
Total Real Estate Loans sums it all up. Growth in total real estate loans slowed to 1.3% in the third quarter, down from 1.9% in the second quarter, and is down 9.3% since the end of 2007.
This is a clear sign that the housing market is not in full recovery mode and that bank stocks have outpaced where they should be trading in a slow-growth economy.
Other Real Estate Owned declined a solid 10.4% in the third quarter as formerly foreclosed properties return to the market. This asset category and the costs associated with it peaked at $53.2 billion in the third quarter of 2010. OREO is now 2% below the level at the end of 2007, and is thus not a balance sheet issue any longer.
Notional Amount of Derivatives has been a financial stress mainly among the seven largest banks. The overall exposure plunged by 6.5% in the third quarter to $179.9 trillion, but is still 8.3% above the level at the end of 2007.
Global notional derivatives still exceed $500 trillion, and if there are counter-party issues from Brexit and other votes in the European Union, there could be unforeseen issues in the U.S. banking system.
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 sequential gain of 3.6% to $90.7 billion has the FDIC is well on its way to satisfy the regulatory guidelines, which is to have the fund at 1.35% of insured deposits by Sept. 20, 2020. At the current level of insured deposits, it is at 1.18%.
Insured Deposits grew by 1.7% in the third quarter to an estimated $6.8 trillion, up 58.4% since the end of 2007. This growth can be attributed to the rise in deposit insurance guarantees to $250,000 from $100,000, which occurred during the height of the credit crisis.
Reserves for Losses had been declining during the healing process of the banking system, but rose by 0.3% in the third quarter for the third consecutive quarterly rise. This is a sign of renewed stress, with reserves now up 20% since the end of 2007.
Noncurrent Loans declined by 1.7% sequentially in the third quarter but are still 21.9% above the level at the end of 2007. Most are legacy loans putting stress on the banking system.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.