A useful piece at the Wall Street Journal discusses the poor prospects for the US banking industry, which will in aggregate post a fourth quarter loss despite heroic interventions by the Fed and Treasury.
The article makes much of recent and almost-certain-to-get-worse bank credit losses as the economy continues to deteriorate. Commercial real estate vacancies, particularly of retail space, are starting to mount. Construction loans were an important business for local and regional banks; a high proportion almost assuredly no longer look viable. And we of course have the grim outlook for credit cards and ongoing weakness in housing.
But the credit losses are masking a second problem: banks’ earnings engine in broken. As many have noted, as long as they are taking losses, they are not terribly keen to extend new credit.
But more serious is the fact that banks had shifted their business model to be more depended on fee income, and much of that was related to the securitization of real estate. Pending changes in credit card rules will dampen down some of the non-interest charges banks could formerly extract. Similarly, a world where the Federal government has become the 800 pound gorilla provider of mortgage credit offers far fewer fee opportunities to banks (and that’s even before considering that transaction volumes are down too).
And as we (and others) have complained, “Where’s my bailout?” maybe it’s time we also start on the less catchy but no less important, “Where’s the good bank/bad bank?” Until the dud assets are recognized, sold off, and banks recapitalized or liquidated, the industry will have a heavy millstone around its neck.
From the Wall Street Journal:
Banks and savings institutions in the U.S. appear headed for their first overall quarterly loss since 1990, as troubled loans pile up faster than the federal government’s unprecedented efforts to aid the battered industry….
“The earnings power for this industry has absolutely collapsed,” says Eric Hovde, chief executive of Hovde Capital Advisors LLC, a money-management firm in Washington that specializes in financial services.
Nearly a quarter of U.S. financial institutions reported a net loss for the quarter ended Sept. 30. The percentage is likely to climb when fourth-quarter results are announced in January, with some analysts predicting that even stalwarts like J.P. Morgan Chase & Co. could tumble into the red….
The glum fourth quarter is an ominous sign for 2009. The U.S. government so far has poured $169 billion into more than 130 financial institutions through its Troubled Asset Relief Program, according to Keefe, Bruyette & Woods Inc. But some banks already are looking for more money or hoarding their existing capital in expectation of another awful year.
Yves here. Repeat after me: you need recapitalization AND price discovery. The near pathological avoidance of the latter by the officialdom would seem to support widespread suspicions that marking assets to market, or even a realistic notion of longer-term value, would confirm that the industry is insolvent.
Back to the article:
In the past few weeks, some analysts have cut 2009 earnings forecasts and stock-price targets for a slew of big and small banks. These analysts expect rising unemployment to trigger deeper losses on credit cards, mortgages and home-equity loans as more consumers fall behind on their bills. Combined with newer problems rippling through commercial real-estate and other types of loans, many banks will need to bolster loan-loss provisions, eroding profits further.
“We believe that deteriorating economic conditions will cause asset quality to get worse in 2009, revealing the inadequacy of loan-loss reserves and impairing profitability,” Jonathan Glionna, an analyst at Barclays Capital, said in a report earlier this month. Nonperforming assets among the 27 financial institutions he covers will rise to $125 billion in the fourth quarter from $43 billion a year earlier, he estimates.
By the end of next year, the figure could top $200 billion, he said…..
As conditions worsen, struggling banks are expected to turn to private-equity firms and other outside investors for capital. Even some of those getting a government infusion may need more capital, analysts warn. Interest in shoring up financial institutions is rebounding as regulators warm up to granting bank charters to nonbank investors.
Ahem, PE firms like to buy assets they can leverage. The reason everyone wants to PE firms to inject capital into banks is to help increase their equity bases, which would lead to a reduction in leverage. That would seem to be an out-trade.
Plus the example of TPG’s $7 billion investment in WaMu blowing up so quickly and completely has no doubt had a considerable deterrent effect on other PE firms who might otherwise have considered taking a flier.