Wednesday, September 8, 2010

Banks Still Aren't Lending

¹²Banks Still Aren't Lending; Credit Crunch Continues

By Econophile | 21 July 2010

From The Daily Capitalist: Loans Fall; Credit Continues To Contract

The megabanks have settled back to earth as they all reported very modest Q2 gains as compared to Q1. Goldman Sachs reported that their profit declined 82% in Q2. Previously, commercial banks JP Morgan Chase, Citigroup, and BofA all reported declines.

The headline for the group is Goldman because of their (former) stellar reputation. They had $1.15 billion of settlements related to their SEC fraud allegation settlement of $550 million and a tax settlement with the UK regarding the taxation of bonuses. If you strip out the settlements they would have had EPS of $2.75 vs. $4.93. What was really interesting was that their mainline business, trading operations, was off 39%; apparently they bet wrong on market volatility because they didn't see the euro crisis coming:

Mr. Viniar [CFO] said the firm was caught off guard by the market's volatility. Goldman's equity derivatives were on the wrong side of bets that stock-market volatility would ease during a quarter when equities had wild swings.

"We didn't hedge it fast enough, let's put it that way," he said. "We were reducing position size and hedging things, but things spiked really dramatically really fast."

I wonder how they measure risk and I wonder if their risk models have changed, post-crash. Enough of Goldman, what is significant in looking at the economy is that the commercial banks were down. Almost every one of them.

Let's start with the better news. This morning, Wells Fargo reported earnings were up 20% QoQ, and up 3% YoY. They did well in most areas and reported overall gains in lending. But, digging a bit deeper, you will see that total loans declined 7.5% YoY and 3.2% from Q1. They said they saw 'improving' loan conditions in the last 30 days and their charge offs are declining, a 16% QoQ improvement. "On the commercial side, for the first time this year, we saw an increase in lending activity and line usage."

Citi reported that their profit fell 37% YoY. They eked out per share earnings.

Weak investment-banking results, anemic loan demand, and a lack of progress in U.S. consumer-banking businesses hampered results, but Citi made progress in shrinking its unwanted assets and its troubled loans continued to subside.

"I'm very pleased we have produced solid operating results for the second consecutive quarter," Chief Executive Vikram Pandit said during a conference call with investors.

Citi's provision to cover trouble loans fell
47%, to $6.7 billion, and the bank took $1.5 billion out of its reserve for loans unlikely to be paid back. Net credit losses fell to $7.96 billion from $11.47 billion.

"The area that is most fragile"
in terms of loan losses remains the U.S.; about
80% of consumer credit losses come from credit cards and mortgages in the U.S., Mr. Gerspach said.

Another Citi fact: The amount of REO properties held reached $1.4 billion, an 81% increase from the same time last year.

You should be aware that you are still a shareholder of Citigroup, the only major bank which hasn't fully repaid their government loans. That's what really irks me about Mr. Pandit when he announced that he was very pleased. This is the guy that sold his Old Lane hedge fund to Citi for $800 million in 2007, then became CEO of Citi, and then his fund ended up being worthless. He should give it all back. Citi received $45 billion in loans through TARP, repaid $20 billion last year, and was allowed to convert the rest of the debt to stock. I hope the government loses money on the deal as a lesson to not bail these companies out, but, just my luck, they'll probably make money on the deal.

Bank of America's net dropped 3%, but as America's largest lender, that's significant. Their revenues shrank 8.8% over Q1 and 11% YoY.

Bank of America's loan portfolio shrank 2.5% from the first quarter and was relatively unchanged from a year earlier, at $967.1 billion. [CEO] Moynihan isolated middle-market commercial clients as a segment that had "done a great job getting delevered and in very good shape" financially.

BofA CFO Noski said: "They're [businesses] ready to go— if uncertainty in the U.S. and Europe dissipates". He wouldn't make a very good salesman. As the old saying goes, "Hope is not a strategy."

The regional banks are worse. Two regional banks, Zions and Marshall & Ilsley, reported losses based on their portfolio of bad commercial real estate loans:

Zions reported a loss of $135 million after the market closed Monday. The Salt Lake City-based lender's $1.96 billion in nonperforming loans— loans at high risk of becoming uncollectable— fell modestly over the first quarter, but still remain higher than three quarters ago. The bank's core revenue also shrunk as total loans fell for the fourth straight quarter.

M&I, based in Milwaukee, reported a net loss of
$174 million and said its troubled loans continued to improved, a key issue for a bank that made big bets on construction loans and has now reported a loss in eight of the nine last quarters. …Wisconsin-based M&I's $2.2 billion in nonperforming loans fell for the fourth straight quarter, and have fallen a total of 7% since the first quarter of 2009.

To put this in perspective, a lot of bank earnings seem to be "gamed", such as reducing loan loss reserves which result in gains, sales of key assets, and 'problem loan' write-ups. But the key thing in all of these reports is that their core business, U.S. business and consumer lending, is down because loan demand is down. All of these factors support the credit contraction charts that show that consumers and businesses are deleveraging, increasing savings, and waiting for positive signs of a recovery before they resume borrowing.

These are the most important statistics in the economy right now. We ask why we have a credit crunch, why banks aren't lending, why borrowers aren't borrowing, and why money supply continues to decline. The short answer is, mostly, commercial real estate loans which hold back every bank as these loans continue to go bad while they watch the commercial real estate market decline. It won't get better until banks are held to higher standard of capital and leverage which means more banks will, and need to, fail.



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