Category Archives: Loan Performance Ratings

Quality ranking of the loan performance of financial institutions.

Prospects for Bank Loan Growth in 2012

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Loan Growth in Banks Requires Job Growth, Increases in Small Business, and Recovery in Housing

 Loan growth for 3,666 average, excellent, and superior IDC rated banks was 1% year over year for the period ended June 2011.  The top quartile grew at 6% or more, while the bottom quartile contracted at 4% or more.  What are the prospects for bank loan growth in 2012?

 Job Growth Declines to Zero

 One of the best predictors of jobs 4 months in the future is the survey on employment by the Institute of Supply Management.  The manufacturing employment survey for September rose to 53.8 from 51.8 the prior month, but down from 64.5 in February 2011.  An index of 56 forecasts zero growth, while the current level of 53.8 predicts 3% negative growth in manufacturing employment in the first half of 2012.  Manufacturing is 10% of total private employment.

The survey of non-manufacturing employment (90% of private employment) fell below 50 to 48.7 in September 2011, down from 51.6 the prior month and below the peak level of 55.6 in February 2011.  The current level of 48.7 forecasts the first half 2012 non-manufacturing or service employment growth near zero, down from 1.5% growth rates in late 2011.  Lack of job growth forecasts zero growth in bank loan demand.

 Small Business Optimism Declines in 2011

 The decline in small business optimism in 2011, coupled with a drop in small business job openings and small business expected credit conditions, forecasts a decline in small business lending.

 Home Builders Market Index of 15 in August 2011 Forecasts Flat Housing Demand

 The sharp decline in the Home Builders (sentiment) Market Index from 70 in 2005 to 8 at the end of 2008 predicted the housing bust and decline in demand for home mortgages.  The sideway fluctuations around 15 in the index projects flat housing demand in 2012.  The Mortgage Bankers Purchase Index measures the demand for new single family mortgages and, currently, is near its all time low of 160,000 and below recent peaks of 200,000.  For mortgage demand to recover, the MBA’s purchase index must rise to the 300,000 level, but current reading indicates a flat housing demand.

 Loan growth, therefore, is expected to decline to slightly negative levels in early 2012, as reflected by job growth, the decline in small business lending, and a flat housing market.

For a more in-depth look at IDC’s methodology and CAMEL analysis for rating the safety of banks, review “how-it-Works” at IDC’s home page and view sample reports.

This article is authored by John E. Rickmeier, CFA.  Mr. Rickmeier has over 30 years of experience in evaluating depository institutions.  As CEO of IDC Financial Publishing (IDC) since its founding in 1984, Mr. Rickmeier and his analytical team currently evaluate and rank quarterly over 16,000 banks, thrifts, and credit unions.  IDC ratings of financial institutions have become the standard in evaluating the safety and soundness of institutions issuing brokered certificates of deposit.  IDC ratings are also used by the Federal Reserve banks, Fannie Mae, Freddie Mac, Ginnie Mae, insurance and credit card companies, state and municipal governments, financial firms specializing in brokered certificates of deposit, individuals and institutions investing in certificates of deposit, and individuals concerned about their bank safety rating.

Banks Continue to Grow Loans

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Quality Community Banks Continue to Experience Loan Growth

 Of the 6,586 U.S. banks identified as community banks, 1,906 (29%) quality community banks experienced loan growth over the past year ending June 30, 2011. IDC Financial Publishing, Inc. (IDC) separately rates loan performance based on adequacy of capital and loan loss reserves to cover problem loans, operating earnings ability to cover expected charge-offs, yield on loans compared to expected loan charge-offs and cost of funds, and finally, the growth and level of problem loans.  The rank scale ranges from 1 (the lowest) to 300 (the highest).

 Community banks rated superior experienced, on average, 7% year-to-year loan growth ending the second quarter of 2011.  Excellent rated institutions grew at 4%, while average rated banks expanded loans at an 11% annual pace.

 Well-managed banks (superior, excellent, and average) normally grow at 10-15% rates in periods of economic expansion.  In the current period of no growth in jobs, small business, or housing, median growth for all banks is a negative 2%.  Yet, the well managed and highly rated community banks continue to grow their loan portfolios.  The below average, lowest ratio, and rank of 1 (one) community banks shrank their loan portfolios in order to shore up capital ratios and deal with their high level of problem loans.

 

For more information on IDC loan ranks, please view a sample report of IDC’s Loan Performance Digest.

 This article is authored by John E. Rickmeier, CFA.  Mr. Rickmeier has over 30 years of experience in evaluating depository institutions.  As CEO of IDC Financial Publishing since its founding in 1984, Mr. Rickmeier and his analytical team currently evaluate and rank quarterly over 16,000 banks, thrifts, and credit unions.  IDC ratings of financial institutions have become the standard in evaluating the safety and soundness of institutions issuing brokered certificates of deposit.  IDC ratings are also used by the Federal Reserve banks, Fannie Mae, Freddie Mac, Ginnie Mae, insurance and credit card companies, state and municipal governments, financial firms specializing in brokered certificates of deposit, individuals and institutions investing in certificates of deposit, and individuals concerned about their bank safety rating.