Are Big Bank Stress Levels Really Higher than ’09 and ’10?
When he spoke Thursday at a conference on the state of the banking industry, Chris Whalen explained why large banks are showing increased stress levels while the rest of the banking industry is (in general) improving.
The reason he gives is simple: look at the date — it’s 3 years after the crisis.
Large banks like JP Morgan (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), and U.S. Bancorp (NYSE:USB) appear riskier compared to the competition because they’re huge and large banks are just not as safe as they were when they were pumped up with government stimulus. It’s pretty normal for them to be riskier compared to their competition: smaller banks.
We have a copy of Whalen’s thoughts, so here’s a full rundown of what analyst Chris Whalen said Thursday when he spoke on a panel at the FRB Atlanta conference on the state of the banking industry.
FYI, the subject of the panel he spoke on was:
The Analyst’s Perspective: What’s to Become of Banks? Adjusting to the New “Normal”
And the questions they (he’s on the panel with Jefferson Harralson, CFA, a Managing Director at Keefe, Bruyette, and Woods) answered were:
- How do banks move from survival to prosperity, given a lack of appetite for borrowing and new rules that alter and limit activities?
- Will the industry continue to consolidate?
Below is a summary of Whalen’s talking points and further below are the charts showing how Whalen scores the stress at several large banks right now. Hint: it’s not good.
The 2010 banking industry looked like this, says Whalen:
- Good news: credit card portfolios are strong; growth in C&I balances are starting to suggest stability in terms of business volumes; large bank losses on loans secured by real estate are still near 3%, a full point above the industry average.
- Bad news: there was a decline in industry revenue and loan balances; volumes in CRE, RES lines remain weak as 2011 begins; real estate is 60% of total bank portfolio and remains flat to down; half of the original principal balance of the $2 trillion in subprime RMBS at start of 2008 has either run off, been charged off or is reported as delinquent; bank construction and development loan portfolio is now half the balance of pre-2008 period; well more than half of all US homeowners are not bankable and much of this population is well under water (based on there being below a 70% LTV in FHA/FNM/FRE production today and judging homeowners that have a FICO score below of 700 as “not bankable”).
- Conclusion: As you can see, there’s more bad news than good news. And as a result, banks show an increase in their levels of stress. But – the increase in stress is largely because after the financial crisis, government stimulus made the large banks in particular (compared to small banks) appear less risky. Now that it’s wearing off, large banks are again (like they were pre-crisis) riskier than small banks. Basically, things are just returning to normal. But Whalen’s full conclusion is great; you can read it below.
* Chris Whalen concludes:
The fact that these large institutions are showing increasing stress at a time when many banks in the industry are recovering and displaying lower BSI scores illustrates aninteresting aspect of the financial crisis and its aftermath. Immediately after the collapse of Lehman Brothers in 2008, the Fed and Treasury began to pump subsidies into the largest money center banks.
Public subsidies, including low interest rates and credit lines from the Fed, TARP capital from Treasury, FDIC guarantees on debt, forgiveness of reps and warranties claims by the GSEs, and other governmental support, made the largest banks appear less risky than their smaller peers, an anomalous position compared with pre-crisis performance.
Now, however, as the public sector subsidies are receding and the losses from on-balance sheet and servicing exposures continue at historically high levels, the largest banks are showing more visible stress in their public disclosure, but the true levels of risk are really unchanged.
The major difference between the 2008-2010 period and the months and years ahead will be that the operational stresses within the largest banks will continue to hurt performance, while the performance of well-managed smaller and medium sizebanks should continue to improve.
Below are the charts that Whalen’s showing today. They show how Whalen scores the stress at several large banks right now.
The tables below give you a top level view of the ratings distribution of the US banking industry as seen from The IRA Bank Monitor Bank Stress Index (“BSI”). The BSI scoresare the result of a quarterly survey of five equally weighted factors — ROE, Capital,Charge-Offs, Efficiency and Lending Exposure — arrayed for all FDIC insured banks andusing the data gathered by the FDIC. – Whalen