Nov 2, 2010
Here are some thoughts from the Bank Analyst on troubled banks in the US:
After parsing through bank earnings one thing that sticks out is non-performing loans (NPL) remain high. Tracking NPLs and more particuarly NPL inflow rates will help you determine the amount of problematic loans coming into the pipeline. In any recovery you should see this number decline sequentially and from 4Q09-2Q10 that’s exactly what you’ve seen across most banks. But results from 3Q paint a different picture particularly in one region.
A closer look and you’ll find that Southeastern banks or banks with heavy exposure in the Southeast are starting to see the rate of inflows increase. On surface you may not be able to spot the NPL trends as a majority of these banks have disposed NPLs through sales or a transfer to held for sale which skew the inflow calculation.
Let’s take a look at some of the Southeastern banks that have reported 3Q results:
Regions Financial (NYSE:RF) which has $133 billion in assets and banks in the southeast saw NPL inflows of $1.4 billion compared to $900 million last quarter. The inflows were primarily due to income producing commercial real estate (CRE) and land/condo/single family loans. A quick glance shows at the end of 9/30/10, RF had $3.372 billion in NPLs, down from $3.473 billion last quarter. Taking the difference plus adding back charge-offs of $759 millions gives you $658 million in NPL inflows and implies a solid deceleration given last quarter’s NPL inflows of $900 million. But RF also transferred to held for sale $1 billion in troubled assets which they marked down $233 million skewing the inflow calculation. The actual inflow rate is closer to $1.4 billion when you consider the $658 million inflows + $1 billion in troubled assets – $233 million mark.
SunTrust (NYSE:STI) with $175 billion in assets saw NPL inflows increase to $296 million from $188 million in 2Q.
BB&T (NYSE:BBT) which has $157 billion in assets saw NPL inflows increase to $693 million from $505 million in 2Q excluding troubled asset sales which would make the inflows worse. 50% of BBT’s loan portfolio are comprised of commercial loans.
All three of the banks above saw NPL inflows decelerate from 4Q09-2Q10.
Synovus (NYSE:SNV) mainly a Georgia bank with $31 billion in assets saw NPL inflows increase to $422 million from $339 million after adjusting for the disposition of $172 million in trouble assets. This was the first increase in 5 quarters.
BancorpSouth (NYSE:BXS) with $13.6 billion in assets and banks around the Gulf had NPL inflows increase to $133 million compared to $115 million. BXS had no troubled asset sales.
Whitney Holding (NASDAQ:WTNY) a Louisiana bank with $11.5 billion assets saw NPL inflows improve but announced that it will sell $180 million in troubled loans and reclassify $100 million in additional NPLs to held for sale in 4Q10.
You are seeing inflows pick up in a few banks in the mid-west as well but it is not as widespread as it seems to be in the Southeast region. There could be a few reasons:
1. A slowdown relative to the rest of the US
2.Inflows continue to improve at the bigger banks(ex-C as numbers remain skewed due to their asset disposition strategy) most likely due to having a diversified footprint and loan portfolio. A good amount of improvement is also coming from card portfolios which most regionals tend to avoid. Typically regionals have higher concentrations of commercial, CRE, and mortgage loans which continue to struggle.
3. Banks are finally owning up to their losses.
I am not implying this is a trend and that we’ll see NPLs skyrocket but I do believe NPLs will remain relatively high and we’ll continue to ebb and flow from these levels for quite sometime. It’s a metric worth monitoring.