GeneG posted on September 14, 2009 16:02
After returning to profitability in the first quarter of this year, U.S. banks and thrifts fell back into the red in the second quarter with performance of their commercial real estate portfolios being one of the major drags on their continued rebound.
Burdened by costs associated with rising levels of troubled loans and falling asset values, FDIC-insured commercial banks and savings institutions reported an aggregate net loss of $3.7 billion in the second quarter of 2009, a decline of $11.3 billion from the $7.6 billion in profits the industry reported in the first quarter. Increased expenses for bad loans were chiefly responsible for the industry's loss.
"Deteriorating loan quality is having the greatest impact on industry earnings as insured institutions continue to set aside reserves to cover loan losses," said FDIC Chairman Sheila Bair. "Of all the major earnings components, the amount that insured institutions added to their reserves for loan losses was, by far, the largest drag on industry earnings compared to a year ago."
Provisions for loan losses totaled $66.9 billion in the quarter, an increase of $16.5 billion (32.8%) over the second quarter of 2008. Both the quarterly net charge-off rate and the percentage of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) reached the highest levels registered in the 26 years that insured institutions have reported these data.
Insured institutions charged off $48.9 billion in uncollectible loans during the quarter, up from $26.4 billion a year earlier, and noncurrent loans and leases increased by $40.4 billion during the second quarter. At the end of June, noncurrent loans and leases totaled $332 billion, or 4.35% of the industry's total loans and leases.
While Percent of Nonperforming CRE Loans Climb, the Number of Loans Falling into Deliquency Declined
Problem income-producing commercial property loans continued to climb as well. The percent of nonperforming (more than 90 days past due) nonresidential income producing property loans (office, industrial, retail) increased to 2.88% ($31.29 billion). That was up from 2.25% ($24.23 billion) three months ago and up from 1.18% ($12.03 billion) a year ago. In addition, the amount of foreclosed nonresidential income producing properties now held by U.S. financial institutions increased to $4.84 billion, more than twice as much as a year ago.
The percent of nonperforming (more than 90 days past due) multifamily loans increased to 3.13% ($6.68 billion). That was up from 2.45% ($5.16 billion) three months ago and up from 1.2% ($2.53 billion) a year ago. In addition, the amount of foreclosed multifamily properties now held by U.S. financial institutions increased to $1.58 billion nearly three times as much as a year ago.
As a lagging indicator of economic activity, the increase in non-performing loan levels was expected. However, the bank's commercial real estate numbers included a positive development as well. Specifically, the amount of loans falling into delinquency during the second quarter began to trail off, declining from 1.37% for both multifamily and nonresidential properties to 1.17% ($12.71 billion) and 1.22% ($2.6 billion) respectively.
"While challenges remain, evidence is building that the U.S. economy is starting to grow again," FDIC Chairman Bair noted. "Banking industry performance is -- as always -- a lagging indicator. The banking industry, too, can look forward to better times ahead. But, for now, the difficult and necessary process of recognizing loan losses and cleaning up balance sheets continues to be reflected in the industry's bottom line."
Fitch Ratings in its review of second quarter bank numbers also said it expects that U.S. banking companies will continue to operate in a tough market environment and be pressured by rising credit costs. Fitch does not expect negative credit trends to reverse themselves in the near to intermediate term, particularly because of increasing concerns regarding exposure to commercial real estate losses.
Fitch said it is highly concerned that the prospect of significant deterioration in commercial real estate is likely to contribute to escalating credit problems the rest of this year - and next. Driven by economic weakness and unemployment, CoStar has reported that virtually all major property types (office, retail, and industrial) are suffering from rising vacancy rates and declining rents.
The weak property fundamentals have caused commercial real estate delinquencies to rise and have put pressure on valuations. The retail and office segments are under considerable stress. Corporate downsizing and rising corporate bankruptcies have translated into weak office demand, pressuring rents, Fitch noted. And it expects vacancy rates in the office sector to hit historically high levels during this credit cycle.
The retail sector will remain under pressure given significantly reduced consumer spending and expectation of further bankruptcies and restructurings in the retail space. Collectively, these factors are expected to increase vacancy across all retail property types.
The second quarter Commercial Real Estate Lending Index from Banc Investment Group in San Francisco also indicates that the lending environment is likely to worsen for at least the remainder of 2009.
The BIG CRE Index fell to 71.24 in the second quarter of 2009 from 80.58 in the first quarter of 2009 - an 11.5% decline. From the index's baseline period beginning April 30, 2007, lending conditions for community banks have deteriorated 28.7%. Conditions in the industrial and retail sectors took the biggest hit, falling 20% and 15.8% respectively.
Because commercial real estate lending is such a large component of many community banks' loan origination, community banks could remain under pressure in the second half of the year, the company said.
"Loan pricing is markedly higher and the risk in lending has dramatically increased because of the stressed environment," said Chris Nichols, president and CEO of Banc Investment Group, the capital markets subsidiary of Pacific Coast Bankers' Bancshares. "In this economy, it is critical to strengthen the credit origination and management process by pricing and managing loans on a risk-adjusted basis. Many institutions are facing challenges because they underpriced loans on a risk-adjusted basis and allowed other factors, such as relationship management, to drive the terms of the credit."
Mark Heschmeyer: 9/02/09 COSTAR Newsletter