The Ones That Matter

For the financial sector bulls, this is the only chart that matters:

(Chart courtesy of StockCharts.com)

For the realists, however, the graphs highlighted in the following post from Nathan's Economic Edge, "St. Louis Fed Charts – Banks Not Looking that Healthy at ALLL…," are the ones that really tell it like it is.

When a banks’ loans begin to non-perform, they begin to eat into their capital reserves. Each banks’ Board of Directors is responsible to assess their reserves and make certain that they comply with legal and accounting requirements and, of course, they are certainly free to maintain standards that are higher than minimums.

The Fed tracks the banks’ Allowance for Loan and Lease Losses (ALLL) and produces charts showing ALLL versus NONPERFORMING loans. A ratio of 100 would mean that all the banks in that size have ALLLs that exceed their nonperforming loans – a condition of health. The lower the ratio number, the less healthy the banks are for that size stratum. The banks are complaining about arbitrary rules regarding ALLL, to learn more here is an article from July of this year; Banks' loan loss reserves are lagging behind delinquent loans… (site will only let you view article once w/o login).

The Fed groups banks into those with ASSETS less than $300 million, those with assets $300M to $1B, those $1B to $20B, and those $20B and Higher. Of course, you and I don’t know how those “assets” are valued or by who. That’s where Enron accounting mark-to-model accounting standards come in – thus the charts below are likely indicating a false sense of health, if you can call them healthy at all. Also keep in mind that there are now millions of home owners underwater on their loans, and many commercial real estate loans are facing the same fate. As asset deflation drives prices lower, any hiccup in income drives those loans into the nonperforming category. Let’s examine the small to medium size ($300M to $1B) and the large banks above $20B…

BANKS $300M to $1B:

Nonperforming loans:


ALLL Ratio:


BANKS over $20B:

Nonperforming loans:


ALLL Ratio:


Here’s the chart of TOTAL nonperforming loans:


So, the big banks would appear to have fewer nonperforming loans, but their ALLL ratio is running around 12 while the smaller banks are up around 30. Again, I’m betting that the REAL ALLL is much, much lower due to mark-to-model, but what you’re seeing here regardless is NOT a picture of health, that’s for sure.

For more on bank capital requirements, you may want to start your research with a visit to Wikipedia - Capital Requirements.

Note that the total loans and leases at all commercial banks are now negative:



And that net commercial loan charge offs are continuing to skyrocket:



And I think the chart of the week is the chart showing net capital inflows. Is that what a loss of confidence looks like?

Comments

[Marc Authier]

New highs on banking stocks while the ratios become horrendously parabolic. What an ugly cognitive dissonnance ! I don't get it. People must be really crazy. It's not the first time that investors have lost their reason.

[farang]

Marc Authier:

Ask yourself who is doing the majority of the buying, churning the stocks with ATF's.....and who is benefiting from higher bank stock prices.....hint: it isn't the Joe Q. Public investor....

[jturner]

Thank you for presenting this important data. While the stocks can act irrational in the shorter term, in the long run the banks are doomed and the govt knows it. Eventually it becomes a cash flow issue, and the govt is just biding time with all the bailouts and stimulus. This is going to really hurt the dollar, and one of the only ways to protect against this is to invest in gold related assets. For a further discussion on the inflationary consequences of the Fed's actions and its potential impact on the gold price, see http://www.goldalert.com . The money printing cannot go on like this without a big reduction in the standard of living for our country.