The rapid pace of asset quality deterioration may force some banks to raise capital fast, or face regulatory review, a Friedman, Billings, Ramsey analyst said Wednesday.
Banks with a rapidly increasing non-performing asset to risk-based capital ratio will likely experience the scrutiny of regulators, FBR analyst Paul Miller wrote in a research note. A ratio approaching 100 percent could trigger sanctions or penalties, but any rapidly increasing ratio could spark a review.
At the end of 2006, no bank's ratio of non-performing assets to risk-based capital was above 19 percent, Miller wrote in the note. At the end of the fourth quarter, both Downey Financial Corp. and IndyMac Bancorp Inc.'s ratios exceeded 50 percent. Both ratios were below 8 percent at the end of 2006.
Those with ratios above 20 percent include Washington Mutual Inc. at 21.8 percent and the nation's largest mortgage lender, Countrywide Financial Corp., at 29.2 percent. Earlier this year, Bank of America Corp. agreed to acquire Countrywide for about $4 billion in stock. Bank of America's ratio stood at 4.2 percent at the end of 2007.
Miller said many banks ratios could rise above 100 percent within the next year.
Non-performing assets have increased rapidly as more types of loans default. Banks' definition of non-performing assets can vary with more conservative banks categorizing a loan as non-performing when it is 90 days past due.
Miller said he expects non-performing assets to continue to increase, meaning the only way banks can avoid potential regulatory problems and sapping their current reserves is to raise cash to shore up their capital base.
Potential regulatory actions could range from memorandums of understanding that outline corrective actions to improve the bank to cease and desist orders, Miller said. And, at any time, the regulatory actions could include a requirement to increase capital levels, he added.
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