Bove braced for (many) more bank failures | FT Alphaville

Bove braced for (many) more bank failures

What fun. Another 150-200 US banks are in line to fail in coming months, according to Rochdale Securities’  Dick Bove (formerly of Ladeburg Thalmann).  Furthermore, according to the banking analyst’s latest note, reported by Reuters on Monday, the industry’s payments to keep the Federal Deposit Insurance Corp afloat could eat up 25 per cent of pretax income in 2010.

This is likely to force the FDIC, which insures deposits, to turn increasingly to non-US banks and private equity funds to shore up the banking system, says Bove, concluding: “The difficulty at the moment is finding enough healthy banks to buy the failing banks”.

Already, more than 80 US banks have failed this year for a total of 106 banks in two years. In fact, Guaranty Bank of Texas became the 81st US bank to fail this year when regulators closed its banking unit on Friday, selling its assets to BBVA, Spain’s second largest bank.

Indeed, as some analysts noted, the BBVA/Guaranty deal marked the first time in the current banking turmoil for a foreign lender to successfully buy a failed US bank.

Under the deal, the FDIC agreed to share in losses with the Spanish bank, which is buying $12bn of Guaranty’s assets, with the FDIC retaining the remaining $1.5bn. BBVA will also assume Guaranty’s $12bn in deposits, noted the FT.

Bove’s gloomy predictions will be welcomed by private equity groups , which have been lobbying hard for a relaxation of proposed new rules for takeovers by buyout firms of troubled lenders. Already, in a scheduled vote later this week (August 26), the FDIC is widely expected to back down on guidelines for private equity firms to invest in failed banks, after critics said previously proposed rules were too harsh and would actually dissuade firms from making investments.

The FDIC had just $13bn in its deposit insurance fund at the end of March – a mere drop in the ocean if it really is going to have to contend with 200 or so new bank failures. Already, the year’s three biggest failures – BankUnited Financial Corp in May, Colonial BancGroup and Guaranty Financial Group in August – have collectively cost the fund roughly $10.7bn.

Bove said the FDIC is likely to levy “special assessments” or premiums against banks in the fourth quarter of this year and second quarter of 2010, and that these charges could total $11bn in 2010, on top of the same amount of regular assessments. The charges could account for a staggering 25 per cent of the industry’s pretax income, he added. All this makes Friday’s swoop by BBVA on Guaranty all the more timely.  In the view of the Wall Street Journal, the BBVA/Guaranty deal could well herald a trend, as foreign banks gain reassurance that they can succeed in the auctions for collapsed US lenders

Other foreign banks with a US presence known to be interested in taking over failing US banks, according to the Journal, include French bank BNP Paribas through its US west coast subsidiary Bank of the West; Toronto-Dominion Bank, through its Maine subsidiary, TD Bank; and Rabobank, the Californian subsidiary of the Dutch parent, Rabobank Group.

The FDIC should be so lucky – though we’re not sure it quite thinks that way.

Related links:
BBVA/Guaranty – Lex
Pension funds back buy-out fight over bank deals – FT
Video: Francesco Guerrera on US bank failures –
FDIC, the ‘F’ stands for…
– FT Alphaville