Big Bank Losses Aren't Over Yet

In September 2008, two weeks prior to the failure of Washington Mutual (now part of JPMorgan Chase (NYSE: JPM  ) ), I wrote: "I think we could see a large wave of bank failures, possibly numbering in the hundreds." With 140 bank failures in 2009, and 20 so far this year, we are well on pace to achieving that. While most of the names on the tombstones in the banking graveyard are obscure, an acceleration in small bank failures is an ominous sign for even the largest banks, including Bank of America (NYSE: BAC  ) , Citigroup, and Wells Fargo (NYSE: WFC  ) .

One of the major contributors to small bank failures is losses on commercial real estate loans. Smaller banks can't tap the capital markets to bolster their balance sheets as easily as a Wells Fargo or a Citi can.. That loss cycle hasn't peaked yet; in fact, according to a Congressional Oversight Panel report on commercial real estate losses published this month, "the most serious wave of commercial real estate difficulties is just now beginning." The data suggests that's no exaggeration.

Delinquencies have yet to peak
Credit rating agency Moody's (NYSE: MCO  ) reported that the loan delinquency rate on commercial mortgage-backed securities (CMBS) rose to 5.42% in January, exhibiting the largest increase since the crisis began.

Another rating agency, Standard & Poor's, found that during the prior two recessions delinquencies on CMBS peaked 25 months and 15 months after the recession ended. Even using the lower of these figures and assuming this recession ended in June 2009, we'd then expect delinquencies to peak no earlier than the fourth quarter of this year.

Losses are yet to come -- at small and large banks
While smaller banks carry a proportionally higher exposure to commercial real estate loans; national and large regional banks (such as Zions Bancorp (NYSE: ZION  ) or M&T Bank (NYSE: MTB  ) ) still have substantial exposure. If you own shares in these institutions, don't be lulled into thinking that all losses tied the credit bubble are behind us -- that would leave you open to some nasty surprises this year and in 2011.

The Fed is creating a new set of risks for investors -- Tim Hanson explains why it's time to get out now!

Whether you believe the recovery will be robust or tepid, companies that perform well in either environment often pay a (sustainable) dividend. The team at Motley Fool Income Investor can show you how to build -- and manage -- a portfolio of high-quality company stocks with robust dividend yield. To find out their six Buy First stocks, take advantage of a 30-day free trial today.

Fool contributor Alex Dumortier loves macro-themed investing; he has no beneficial interest in any of the stocks mentioned in this article. Moody's is a Motley Fool Inside Value recommendation. Moody's is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended a write puts position on Moody's. Try any of our Foolish newsletters today, free for 30 days. Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 23, 2010, at 2:15 PM, stocktrader007 wrote:

    Banks are not out of the woods yet! Small business lending is down. But this is not new news. This has been the trend for the last 30 years! Banks have been lending to the wrong borrower, the consumer, for decades. Banks are going to suffer the consequences of deflation:

    http://www.tradingstocks.net/html/signs_of_deflation.html

    Had they lended to the business instead of the consumer, there would be hope of creating real value through business activity to repay these loans. But consumers consume. Their loans are backed by depreciating assets such as cars and homes. As deflation hits, these loans will go bad!

    FDIC is broke. We will need another bailout soon! As FDIC scrambles for money, it levies extra fees on member banks. These fees push marginally healthy banks closer to the cliff. Once they fall off, they pull others closer to the brink of failure, too!

    http://www.tradingstocks.net/html/fdic_insurance.html

    Keep your dollars safe! As det deflates, remaining dollars will gain in value. US dollar rally is real! 2008 was just the warmup. We printed 2 trillion. But total debt is to the tune of 50 trillion! Debt is our money supply. It is deflating! Keep your money in safest banks or US short term treasuries. Remain liquid, because at the bottom of the depression, massive money printing may start and you may have to jump out of dollars!

    FDIC is part of the problem. Existence of FDIC blinded the depositors. Unquestioned by depositors, banks got the green light to take excessive risk. If FDIC did not exist, depositors would be analyzing banks just like they analize stocks before they put their money in. Once again, government regulation, this time in the form of FDIC, actually resulted in the opposite effect! That is: the destruction of the banking system!

  • Report this Comment On February 23, 2010, at 2:16 PM, stocktrader007 wrote:

    Banks are not out of the woods yet! Small business lending is down. But this is not new news. This has been the trend for the last 30 years! Banks have been lending to the wrong borrower, the consumer, for decades. Banks are going to suffer the consequences of deflation:

    http://www.tradingstocks.net/html/signs_of_deflation.html

    Had they lended to the business instead of the consumer, there would be hope of creating real value through business activity to repay these loans. But consumers consume. Their loans are backed by depreciating assets such as cars and homes. As deflation hits, these loans will go bad!

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1118675, ~/Articles/ArticleHandler.aspx, 9/17/2014 11:53:20 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement