What’s this? A sort-of-downbeat bank note from Rochdale Securities analyst Richard X Bove?
Using fourth-quarter data from FDIC, Richard ‘I ♥ banks’ Bove, has put together a presentation on banks’ asset quality.
While Bove is — unsurprisingly — generally bullish on the sector, he does point out a couple of things that piquedFT Alphaville’s attention, seeing as we’ve heard them mentioned them before.
The first is that bank reserves have been declining relative to non-performing assets (NPAs). In fact, according to Bove, the ratio of reserves to NPAs is now 50.1 per cent, down from 150.1 per cent in June 2005:
And here’s his point:
This means that the banks are overstating both their i earnings and their book values. The amount of the overstatement of book value is about $225 billion. This is approximately 15.6% of common equity. It raises the question as to whether the banks are as well capitalized as indicated above. The answer is that they are still very well capitalized relative to history but no where near as strong as the reported ratios suggest. If non‐performing assets do not fall soon, banks must increase their reserves or their common stock prices will plummet, once again. If non‐performing assets rise further, banks must rebuild their reserves. Failure to do so will result in all of the gains of the past year in market value being lost. Thus, one might expect bank earnings to remain under pressure as the industry deals with this issue.
And here’s a datapoint on those assets: foreclosure filings numbered 360,149 in July 2009 and 315,716 in January 2010, Bove says, suggesting perhaps that the number has peaked.
But there’s a catch:
The reason that the number is declining could be misleading, however. If a bank decides to renegotiate a loan or the government intercedes in the process, then the loan is still a problem but there is no foreclosure. Best guess is that without the renegotiation process currently in place in the industry foreclosures industry, would be rising rather than stabilizing. The single family housing problem will be with the banking industry for at least the next 3 to 5 years.
Anyway, Bove’s central argument is that the banking sector’s balance sheets are “quite healthy” overall. He expects bank earnings to grow by a whopping 300 per cent to 500 per cent between 2011 and 2015.
But there’s still 2010 to get through:
However, this is still the first half of 2010. The dominant facts this period are that bank reserves have not grown at the same rate as non‐performing assets; non‐performing assets are still growing albeit at a slower rate; and problems in unhealthy banks will result in sizable charges on the earnings of healthy banks through FDIC assessments. The net result is expected to be continued losses at regional banks. Bank stock prices have risen rapidly reflecting the potential earnings gains two to four years out. They may not be reflecting the possibility of severe problems in the industry before this time.
Related links:
Shadow bank losses - FT Alphaville
Hamp, what is it good for? – FT Alphaville
Great Depression-esque bad debt at banks – FT Alphaville