Four Too Big To Fail Banks Set Multi-Year Highs

NEW YORK (TheStreet) -- The four 'too big to fail' money center banks became bigger in the third quarter controlling 44.34% of the $14.6 trillion of assets in the banking system, up from 43.95% in the second quarter.

JPMorgan ( JPM) increased total assets to $2.12 trillion or 14.5% on the total, while Bank of America ( BAC) decreased assets to $1.62 trillion or 11.1% of the total. Wells Fargo ( WFC) stayed in third place increasing assets to $1.38 trillion or 9.5%. Citigroup ( C) stayed in fourth place raising total assets to $1.35 trillion or 9.2%.

Bank of America ($15.73) set a new multi-year high at $15.98 on Nov. 25, maintains a hold rating, and is 27.1% overvalued. Since the end of the second quarter of 2008 this 'too big to fail' money center bank has reduced assets by $164.7 billion to a total of $1.62 trillion, which is 11.1% of the total assets in the banking system. My semiannual value level is $10.09 with a quarterly pivot at $15.30 and annual risky level at $17.07.

Citigroup ($52.62) set a multi-year high at $53.68 on Nov. 25, maintains a hold rating, and is 45.9% overvalued. Since the end of the second quarter of 2008 this 'too big to fail' money center bank has increased assets by $21.7 billion to a total of $1.35 trillion, which is 9.2% of the total assets in the banking system. My semiannual value level is $47.14 and a quarterly pivot at $52.56 and monthly risky level at $55.23.

JPMorgan ($56.98) set a multi-year high at $58.14 on Nov. 25, maintains a hold rating, and is 28.6% overvalued. Since the end of the second quarter of 2008 this biggest of the 'too big to fail' money center bank has become even bigger by increasing assets by $315.9 billion to $2.12 trillion, which is a way too big controlling 14.5% of the total assets in the banking system. My semiannual value level is $50.37 with a quarterly risky level at $59.44.

Wells Fargo ($44.18) set a multi-year high at $44.78 on July 23 and the recent high has been $44.74 on Nov. 26. The stock maintains a hold rating and is 23.0% overvalued. Since the end of the second quarter of 2008 this 'too big to fail' money center bank has increased assets by $40.7 billion to $1.38 trillion, which is 9.5% of the total assets in the banking system. My semiannual value level is $40.04 with a quarterly risky level at $48.05.

In total the four 'too-big-to-fail' banks have $6.47 trillion of the $14.6 trillion assets in the banking system which is a concentration of 44.3%, up from 43.9% at the end of the second quarter. In my judgment a single bank should not be allowed to control more than 10% of the total assets in the banking system, which means that Bank of America and JP Morgan should be forced to reduce assets.

Last week S&P reported that JP Morgan and Bank of America are among eight of the larger U.S. banks that could be forced to pay $56.5 billion to $104 billion to settle additional mortgage-related claims. S&P calculates that these eight banks have capital buffers of about $155 billion combined, enough to absorb the losses, and that these legal liabilities would thus not hurt banks' ratings.

Federal Deposit Insurance Corporation earlier reported the banking system earned $36 billion in the third quarter of 2013 down from $38.1 billion in the second quarter, and down 3.9% year over year, the first year over year decline since the second quarter of 2009. Second quarter earnings were originally reported at $42.2 billion so it was downwardly revised by $4.1 billion. The earnings decline was attributed to a $4 billion increase in litigation costs at one institution, lower revenue from mortgage lending, and the reduced sales of assets.

Chart Courtesy of FDIC

Comparing Third Quarter Data To Second Quarter Data

Total Assets in the banking system increased 1.3% sequentially in the third quarter of 2013 to $14.6 trillion, which is a year over year gain of 2.6%.

Residential Mortgages on the books of the banks declined by $13.7 billion in the third quarter to $1.84 trillion down 0.7% sequentially and 2.5% year over year. It appears that mortgage credit guidelines remain too tight, and that demand for mortgages has declined as rates rise.

Mortgage originations for 1 to 4 family residential real estate loans declined by 30.1% to $136.8 billion sequentially as the rise in interest rates reduced demand for mortgage refinancings. Noninterest income from the sale, servicing and securitization of mortgages declined by $4.0 billion 45.2% lower than a year ago.

Nonfarm Nonresidential Real Estate Loans rose by $9.2 billion in the in the third quarter to $1.09 trillion which is a sign that banks feel safer lending to builders of office buildings, strip malls, condos and apartments, rather than single-family homes. This portion of CRE loans is up 0.8% sequentially and 3.3% year over year.

Construction and Development Loans rose by $3.6 billion in the third quarter to $206.1 billion. This is a sign that community banks are beginning to be less stingy to homebuilders and developers. This portion of CRE lending is up 1.8% sequentially, but is still down 2.0% year over year.

Home Equity Loans declined by $10.9 billion in the third quarter despite the continued rise in home values. In my judgment this asset category continues to contain noncurrent loans. Home equity loans are down 2.1% sequentially and 8.9% year over year.

Total Real Estate Loans declined by $11.8 billion in the third quarter to $3.66 trillion as write-offs exceed new lending.

Insured Deposits increased by $3 billion to $5.97 trillion in the third quarter despite extremely low CD rates.

Notional Amount of Derivatives rose by $6.39 trillion in the third quarter up 2.7% sequentially and 5.9% year over year. This continues to be a concern as the larger banks continue to increase leverage when they should be decreasing these exposures.

Reserves for Losses declined by $6.5 billion to $142.6 billion in the third quarter down 4.3% sequentially and down 14.6% year over year.

Noncurrent Loans declined by $18.3 billion to $221.1 billion in the third quarter down 7.7% sequentially and down 24.6% year over year.

Other Real Estate Owned declined by $792 million to $31.8 billion in the third quarter down 2.4% sequentially and down 22.5% year over year.

While this continues to show a more healthy banking system, it's a question of whether the glass is half full or half empty. Let's look at the Q3 2013 statistics vs. the statistics in Q4 2007.

Number of Banks The number of FDIC-insured financial institutions declined by 1,643 since the end of 2007 to 6,891 at the end of the third quarter of 2013. That's a decline of 19.3% with 488 of the decline done via the FDIC bank failure procedures.

Total Assets Despite the Great Credit Crunch total assets in the banking system increased by $1.56 trillion since the end of 2007, up 11.9% to $14.6 trillion.

Residential Mortgages declined by $403.9 billion since the end of 2007, a slide of 18%.

Nonfarm Nonresidential Real Estate Loans increased by $124.1 billion since the end of 2007 a gain of 12.8%. This segment of CRE loans have been deemed less risky.

Construction and Development Loans declined by $422.8 billion since the end of 2007, a whopping 67.2%. This is the real estate segment that took the deepest hits with much of this risk among community and regional banks.

Home Equity Loans declined by $89.6 billion since the end of 2007. It has been difficult for banks to collect on bad home equity loans if the bank does not control the first lien mortgage.

Total Real Estate Loans declined by $792.2 billion since the end of 2007, down 17.8%.

Other Real Estate Owned while declining significantly in recent quarters this category is still up $19.7 billion since the end of 2007, up 162.1%. This includes a hidden inventory of foreclosed homes.

Notional Amount of Derivatives many of the problems that surfaced during the Great Credit Crunch occurred in derivatives, yet the banking regulators have allowed this category to rise by $76.8 trillion since the end of 2007, or by 46.2%.

Deposit Insurance Fund The DIF balance rose to $40.8 billion in the third quarter of 2013 but its down $11.6 billion or 22.2% since the end of 2007. Member banks are the major source of these funds via assessments.

Insured Deposits increased by $1.677 trillion or 39.1% since the end of 2007, and if this growth continues the DIF pressures intensify.

Reserves for Losses while declining nicely in recent quarters; reserves are still up $40.9 billion since the end of 2007, up 40.2%.

Noncurrent Loans have declined significantly in recent quarters, but are still up $111.2 billion since the end of 2007, a gain of 101.1%. This is a sign that the Great Credit Crunch continues.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Suttmeier is the chief market strategist at AlphaPlus Analytics in addition to ValuEngine.com. He has been a professional in the U.S. Capital Markets since 1972, transferring his engineering skills to the trading and investment world.

Suttmeier has an engineering degree from Georgia Tech and a Master of Science degree from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. He became the first long bond trader for Bache in 1978, and formed the Government Bond Department at LF Rothschild in 1981, helping establish that firm as a primary dealer in 1986. This experience gives him the insights to be an expert on monetary policy, which he features in his newsletters, and market commentary.

Suttmeier's industry licenses include, Series 7 and Registered Principal (Series 24). He has been the Chief Market Strategist for ValuEngine.com since 2008 and often appears on financial TV.

Click here for details on Suttmeier's "Buy and Trade" investment strategy.

Richard Suttmeier can be reached at RSuttmeier@Gmail.com

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