Interest Rate Roundup

Thursday, May 31, 2007

Scintillating stats in the latest QBP

Do you know what the initials "QBP" stand for? If so, I'm sorry. It proves that like me, you spend way too much time following arcane data on banking, interest rates, and credit quality!

Anyway, the QBP is the FDIC's Quarterly Banking Profile (warning: large PDF link) -- a document that sums up the latest trends in the U.S. banking industry. A key takeaway from the Q1 2007 report? Credit quality is starting to head south, led by deteriorating residential mortgage loan performance (see the figures I have bolded).

Take it away, QBP ...

==> "Reflecting an erosion in asset quality, provisions for loan losses totaled $9.2 billion in the first quarter, an increase of $3.2 billion (54.6 percent) from a year earlier." (Later on, the report makes clear the $3+ billion increase was the largest since Q1 2002)

==> "Net charge-offs totaled $8.1 billion, an increase of $2.7 billion (48.4 percent) from the first quarter of 2006. Charge-offs were higher in most loan categories. Net charge-offs of credit card loans rebounded from an unusually low level a year ago, increasing by $850 million (29.2 percent). Similarly, net charge-offs of other loans to individuals were $754 million (60.0 percent) higher than a year earlier. Net charge-offs of loans to commercial and industrial (C&I) borrowers increased by $470 million (78.6 percent), and net charge-offs of 1-4 family residential mortgage loans were up by $268 million (93.2 percent)"

==> "Since reaching a cyclical low of 0.70 percent at the middle of last year, the percent of insured institutions’ loans that are noncurrent (90 days or more past due or in nonaccrual status) has risen in each succeeding quarter. At the end of March, the noncurrent rate stood at 0.83 percent, its highest level in two and a half years. During the quarter, noncurrent loans increased by $4.0 billion (7.0 percent). Noncurrent levels increased in most loan categories during the first quarter, with the largest increases occurring in real estate loans.

==> "The percentage of 1-4 family residential mortgage loans that were noncurrent rose from 1.05 percent to 1.13 percent during the quarter. This is the highest noncurrent rate for residential mortgage loans in the 17 years that insured institutions have been reporting these data."

==> "Insured institutions set aside $1.1 billion more in loss provisions than they charged off during the quarter, contributing to a $993-million (1.3-percent) increase in loan-loss reserves. This is the largest increase in loss reserves since the fourth quarter of 2002 ... The increase in reserves failed to keep pace with growth in noncurrent loans, and the industry’s “coverage ratio” of loss reserves to noncurrent loans fell from $1.37 in reserves for every $1.00 in noncurrent loans to $1.30 during the quarter. This is the fourth consecutive quarter that the coverage ratio has fallen. It is now at its lowest level since March 2003."

So in short, more real estate loans are going sour ... banks are setting aside more money to cover bad loans ... but because loans are going sour at a faster rate than the banks are adding reserves, coverage ratios are slipping. Not so peachy. One last thing: The FDIC had its first bank failure since June 2004 in the first quarter, and the number of "problem" institutions climbed to 53 from 50 (assets at problem institutions shot up to $21.4 billion from $8.3 billion)


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