Thursday, September 2, 2010

US Banks' CRE Pipeline Analyzed

Sep. 1 2010 - 11:13 am 
This morning the Wall Street Journal discovered something that I have been pounding the table about for months. Namely there are a lot of sick small banks out there and they are going belly up in droves.
Here are some of my previous stories:
Here is an update to my coverage of banks:
From the FDIC for the second quarter 2010:
There were 45 bank failures in the second quarter, and we likely ended the quarter with less than 7,900 FDIC-insured financial institutions.
  • 2,504 or 31.7% are thus overexposed to Commercial Real Estate loans.
  • 3,939 of 49.9% of all banks have a pipeline that’s 80% or more funded.
Half the community banks in America remain overleveraged to Commercial Real Estate (CRE) and the possible losses remain about $1.5 trillion.
Assets among banks with a CRE pipeline of 80% or more funded increased to $3.84 trillion including $121.3 billion in Construction & Development loans.
The average pipeline for 3,939 banks is 92.0%. Among this list are four big banks that will likely see waves of write-offs in upcoming quarters.
  • JP Morgan Chase (JPM) with $1.72 trillion in assets has a pipeline of 80%.
  • SunTrust Banks (STI) has $160.5 billion in assets with an 83% pipeline.
  • BB&T Corp (BBT) has $149.2 billion in assets with an 84% pipeline.
  • Fifth Third Bank (FITB) has 100.0 billion in assets with an 84% pipeline.
The FDIC says that the banking system is on the mend given data from its second quarter Quarterly Banking Profile. This is misleading when you analyze the devils in the details.
  • The FDIC list of Problem Banks jumped to 829 from 775 with 45 bank failures in the second quarter up from 41 in the first quarter.
  • Total Assets in the banking system declined by $136.2 billion sequentially to $13.22 trillion. Since peaking in the fourth quarter or 2008 the banking system as lost $622.7 billion in assets.
  • Commercial Real Estate Loans including Construction & Development Loans declined $44.34 billion sequentially with Other Real Estate Loans setting another record high of $49.3 billion.
  • The banking system needs to de-leverage even more considering that the Notional Amount of Derivative Contracts increased another $7.365 trillion to $225.4 trillion at the end of the second quarter. Since “The Great Credit Crunch” began at the end of 2007 the Notional Amount of Derivative Contracts have increased $60.65 trillion.
Despite all of the bad nwes, there are a number of publically traded banks I am buying. These are banks that are being used by the FDIC as consolidators following Bank Failure Friday.
In the ValuTrader Model Portfolio are: CenterState Bank (CSFL),Marshall & Ilsley (MI), Whitney Holdings (WTNY) and Zions Bancorp (ZION).
ValuEngine will publish a new list of problem banks next week.
Richard Suttmeier

ValuEngine's Chief Market Strategist Richard Suttmeier has worked in the US Capital Markets for more than thirty-five years. Suttmeier has long been one of ValuEngine's "power users," supporting his own technically-focused analysis with VE's fundamentally-based quant methods. Suttmeier provides ValuEngine clients access to a series of indepth custom reports on banking, commodities, and other areas, as well as his extensive knowledge of technical analysis and the financial markets in general.

Suttmeier has made a variety of timely calls in his career. He correctly predicted the crash of the homebuilders in the summer of 2005 and in April 2006 he warned of an impending crash in the US real estate market. More recently, he called the most recent market bottom and predicted a 40-50% Bear Market Rally for the S&P 500 on March 6, 2009.

His research has been used by major institutions such as the Open Market Trading Desk at the Federal Reserve Bank of New York, the Treasurer of the State of Ohio, Wall Street professional traders, and high-net worth individuals.

Suttmeier is an experienced financial media figure and over the years has been a guest on CNBC, CNN, CNNfn, New York 1, Bloomberg TV and radio, Fox Business, Business News Network in Canada, Wall Street Week With Fortune, and the Yahoo Tech Ticker. In 2002, Suttmeier anchored his own show on Yahoo Finance Vision called "Traders' Club with Richard Suttmeier." He is frequently quoted in USA Today, The NY Times, Wall Street Journal, Reuters, and The Dow Jones Newswires.
Suttmeier holds a bachelor's degree from the Georgia Institute of Technology and a master's degree from Brooklyn Polytechnic University. Before he entered the world of finance, he worked on the Apollo lunar module and the F-14 Tomcat as an engineer at Grumman. Suttmeier also worked as the U.S. Treasury strategist for Smith Barney and the Chief Financial Strategist for William R. Hough & Co. Recently, Suttmeier served as the Chief Market Strategist for Joseph Stevens as well as RightSide Advisors before joining ValuEngine.