Still Waiting for Early Signs of a Banking Recovery

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As of late, euphoria in bank stocks has rest on a simple prediction: The losses that brought so much pain over the past two years are finally coming to an end.

As a precursor to the real deal, delinquency rates are often a good metric to use to judge future losses. But looking at the Federal Reserve's recent quarterly delinquency report, loan delinquencies are not only not stabilizing, but also still growing at a fierce clip. Have a look:


Residential Real Estate

Commercial Real Estate

Credit Cards

Total Loans and Leases

Q2 2009





Q1 2009





Q4 2008





Q3 2008





Q2 2008





Q1 2008





Source: Federal Reserve.

That ain't pretty. In a period when markets plowed unreal amounts of money into financial stocks, loan delinquencies got worse in every major lending class. For investors hoping, wishing, and praying that banks are out of the woods and will quickly return to the days of glorious profitability (or, legitimate profitability I should say), that's a classic setup for disappointment.

The arrangement here is fairly straightforward: As long as loan delinquencies are rising, future -- not just current -- deterioration and losses on banks' books will continue. For those with large exposure to consumer loans -- including Bank of America (NYSE: BAC  ) , Citigroup (NYSE: C  ) , and Wells Fargo (NYSE: WFC  ) -- rising delinquencies is a surefire recipe for future pain. Unless you're talking about a bank like Goldman Sachs (NYSE: GS  ) or JPMorgan Chase (NYSE: JPM  ) that's raking in money from investment-banking products like trading revenue, the outlook for banks is still, in my view, potentially pitiful.

What would get me to change my opinion? I'd love to see one quarter of loan delinquency improvement -- something that hasn't happened since early 2006. Once delinquencies start to subside, investors can realistically assume that a sustainable recovery is at hand.

Until then, markets seem hellbent on wagering on something that clearly isn't happening. And that's a strategy that usually doesn't end well.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (14)

Comments from our Foolish Readers

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  • Report this Comment On August 18, 2009, at 10:45 AM, plange01 wrote:

    if you were waiting for a actual recovery in banks you missed the chance to make money on the stocks!there will be no recovery the US is 8 months into a depression! that does not mean you cant make money...

  • Report this Comment On August 18, 2009, at 10:49 AM, cmfhousel wrote:

    "if you were waiting for a actual recovery in banks you missed the chance to make money on the stocks!"

    I'd agree if we were talking about actual losses. But delinquencies are the early warning signs of losses. Rising delinquencies indicate future, not current, trouble.

  • Report this Comment On August 18, 2009, at 11:02 AM, MKArch wrote:

    I believe the data you present is base on defaults at all stages however most of the banks are reporting a slow down in early stage defaults which will lead to a future slow down in delinquency numbers.


  • Report this Comment On August 18, 2009, at 11:05 AM, VegasMartin wrote:

    It amazes me how banks were able to become profitable over the first two quarters despite loan delinquencies. Something has to be up such as suspicious accounting tactics. I don't think it can last. The Q3 numbers should paint a much better picture.

  • Report this Comment On August 18, 2009, at 12:54 PM, ikkyu2 wrote:

    Well stated, Morgan.

    There's no law against waiting to invest until the fundamentals are sound. Sure, you miss the first little run-up in prices, but you also miss the chance to jump off the cliff with all the other lemmings.

    People need to remember that they're not competing with their favorite hedge fund operator to book a daily trading game. They're trying to preserve capital and save money for their retirement. They don't have to ride every horse that comes down the pike.

  • Report this Comment On August 18, 2009, at 2:20 PM, Vafer wrote:

    Be careful. Why would you paint BAC, C and WFC with the same brush. Do you think they all will have the same delinquency rate. I believe the delinquency rates would be C > BAC >> WFC.

    Long on WFC.

  • Report this Comment On December 15, 2009, at 1:08 AM, tarig wrote:

    The banks are profitable (enought to pay back TARP!) despite the increasing loan delinquencies due to several very powerful forces (1) the Treasury buying more than $1 Trillion of almost worthless mortgage-backed securities from the banks at 100 cents on the dollar (2) the Fed allowing almost unlimited borrowing by banks at near zero percent intrest with questionable collateral (3) the FDIC assuming a big chunk of any losses from the banks acquired by the largest remaining banks (4) the implicit and explicit guarantees the government has made to back up the banks and (5) the massive "quantitative easing", which has inflated the value of bank assets and, by lowering the value of the dollar, reduced the cost of paying back any debt the banks had on their books to the extent they invested in anything other than dollars. All of this help to the banks STILL won't save all of them (but it helps the largest banks the most) and comes at the cost of higher future taxes on everyone and a weaker dollar for all of us.

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