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:
|
Period |
Residential Real Estate |
Commercial Real Estate |
Credit Cards |
Total Loans and Leases |
|---|---|---|---|---|
|
Q2 2009 |
8.84% |
7.91% |
6.70% |
6.49% |
|
Q1 2009 |
7.85% |
6.46% |
6.68% |
5.58% |
|
Q4 2008 |
6.31% |
5.44% |
5.64% |
4.62% |
|
Q3 2008 |
5.24% |
4.72% |
4.73% |
3.74% |
|
Q2 2008 |
4.45% |
4.19% |
4.86% |
3.37% |
|
Q1 2008 |
3.72% |
3.47% |
4.86% |
2.85% |
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
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.
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