Tag Archives: Bank Ratings

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.

Bank and Thrift Ratings

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IDC’s Ratings of Banks and Thrifts
Confirmed by IDC’s Stress Tests

IDC Financial Publishing, Inc.’s (IDC) stress tests banks, bank holding companies, and thrifts on a quarterly basis. The stress test projects potential net write-downs based on percentage loss expectations of the FDIC and Federal Reserve but subtracting the loan loss reserves and pre-tax profit and loan loss provision. The adjusted Tier I capital and assets, reduced by net write-downs, provides a worst case Tier I capital ratio. Given a worst case Tier I ratio less than 4% determines the required new Tier I capital addition.

IDC rates banks and thrifts from 1 (the lowest) to 300 (the highest) with a rating of 74 or lower establishing the watch list of problem banks. All but 2 banks with a stress test capital requirement of 100% of current Tier I capital were rated 74 or lower (mostly ratings of 1). All thrifts with a stress test requirement of 100% of current Tier I capital were rated 74 or lower (mostly ratings of 1). A similar result occurred in the stress tests on bank holding companies.

Too Big to Fail

The stress test on bank holding companies revealed two large institutions with sizeable capital requirements. IDC estimates Bank of America Corporation requires $51.9 billion in new Tier I capital using the same stress test applied to all banks, bank holding companies, and thrifts. Bank of America announced on May 7th a need for $33.9 billion more in Tier I capital. The increase in stress test net write-downs was due to a second quarter 2011 decline in loan loss reserves and pre-tax profit. The IDC estimate of $51.9 billion or 34% of current Tier I capital coincided with an increase in the 5-year CDS level from 150 in July to 400 on August 23 and 340 in early September of 2011. Bank of America raised an estimated $20 billion in new equity in August 2011.

The second bank holding company with large capital requirements was MetLife, Inc. IDC estimated new Tier I capital in the amount of $43.4 billion, or 116% of current Tier I capital, was needed. Coincident with the timing of the new capital required, the CDS level of MetLife rose from 150 in July to 300 in late August 2011. Mortgage securities and other investments increased from $150 billion as of March 31, 2009 to $271 billion on June 30, 2011. The stress test percentage loss estimate of 24% on these loans created a chronic need for new capital. Loss rates on these securities less than 24% would reduce capital required.

Mortgage-backed securities at MetLife were priced at 88.5 in the fourth quarter of 2008 and increased in value to 102.3 as of June 30, 2011. These current valuations support a lower loss expectation. A further note, IDC rates MetLife, as a bank holding company, at 124 (below average) due to their total risk-based capital ratio of 9.2%, below the well-capitalized requirement of 10%.

For a more in-depth look at IDC’s methodology and CAMEL analysis, 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 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.

1-Though not currently used as a component to rank financial institutions, IDC has been monitoring CDS spreads, a form of insurance on debt repayment. CDS spreads can be an indicator of investors’ lack of confidence in the ability of issuers to repay debt. These spreads represent costs on $10 million of debt.