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The FDICs Quarterly Banking Profile reveals a dark 2010

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					               The FDIC’s Quarterly Banking Profile reveals a dark 2010
Saxo Bank Research Note          Feb. 24 2010        Market Strategist Robin Bagger-Sjöbäck


Yesterday, the FDIC released their Quarterly Banking Profile (QBP), a report much awaited by both
active investors as well as the general public. The QBP smoothly summarizes the US financial sector
performance over the previous quarter, as well as its overall health for more than 8,000
commercial banks and savings institutions, covered by the FDIC insurance.


Total net operating income for financial institutions covered by the FDIC reported a weak positive
number of $914 million for Q4 2009. However, the YoY comparison is striking, pointing to that the
industry sustained a Q4 net operating loss in 2008 of $37.8 billion, most of which belonged to the
larger banks. What is confirmed in this report is that much of the increased earnings over the year
are largely concentrated to large banks and there is definitely a strong correlation between
improved earnings and loan guarantees, stimulus packages etc. This supports the notion that once
again regional institutions, which are often small- or mid-sized in nature, are left out in the cold.
Further consolidation in the US banking industry should be expected as this year has already seen
20 new failures (YTD) and climbing.


When taking a look at full year earnings, the $12.5 billion earned in 2009 was indeed an
improvement compared to the $4.5 billion that the industry made in 2008. Historically, the 2009
earnings are still very bleak.


Even though there were areas with substantial improvements (like in non-interest income, trading
activities and net interest income) these were heavily offset by a $71.5 billion increase in loan-loss
provisions. The changes in loan loss provisions (which increased by 40.6% YoY) can be interpreted
as a proxy for the near future performance of loans, derived by the banks themselves. Such a YoY
increase supports our hypothesis back from the summer of 2008 and which more recently was
communicated in Saxo Bank’s Yearly Outlook for 2010 that we have a very bumpy road in front of
us in terms of huge dollar amounts of loans that are set to refinance, linked primarily to the
housing market and commercial real estate.


It might seem unreasonable to claim, but the numbers mentioned above are all somewhat
positively biased. Not only was 2009 the year with the highest proportion of unprofitable
institutions since 1984, but full-year collective earnings would probably not be in the green if it
were not for the exclusion of failing institutions’ losses during that same year.




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                              Problematic Bank Loans ($ Bn)
       $450                                                                                  $60.0
       $400
                                                                                             $50.0
       $350
       $300                                                                                  $40.0
       $250
                                                                                             $30.0
       $200
       $150                                                                                  $20.0
       $100
                                                                                             $10.0
           $50
           $0                                                                                $0.0




                                Noncurrent Loans (RHS)     Net Charge-Offs (LHS)

As actual loan losses (i.e. net charge-offs) rose for the twelfth quarter in a row, asset quality
indicators followed suit implying that they all fell. With total net charge-offs for 2009 of $53 billion
(a 37.2% increase YoY), again the areas contributing the most was real estate loans ($28.8 billion),
commercial and industrial loans ($8.3 billion) and home-equity loans ($5.2 billion). Heard of these
particular markets before?


The Deposit Insurance Fund
Turning to the controversial deposit insurance fund (DIF) that has been widely discussed under
H209 as it actually went “bankrupt”, thus forced the FDIC to require insured institutions to prepay
13 quarters worth of insurance premiums, amounting to $46 billion. These prepayments have at
least temporarily filled up the otherwise rather illiquid state of the DIF. Going into the fourth
quarter of 2009 the DIF was in the red by more than $8.2 billion and with a further outflow of $12.6
billion during the last three months of 2009 it now reads -$20.9 billion. However, it is worth
mentioning that according to the FDIC report, cash and marketable securities available to the DIF
stands at $66 billion as of year-end.


For the full-year of 2009, the balance of the fund shrunk by $38.1 billion (FDIC estimated costs to
$36.4 billion during the year), to just beat 2008, when FDIC estimates predicted $16.4 billion, but
the actual losses related to banking failures came out at $35.1 billion. As illustrated in the graph
below, a combination of a shrinking balance in the DIF with rising deposits puts pressure on the
reserve ratio that now is at -0.39% compared to 1.22% just two years ago and -0.16 in Q309.




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                                      FDIC Reserve Ratio & Insured Deposits
       $6,000,000                                                                                                                                                                              1.40%
                                                                                                                                                                                               1.20%
       $5,000,000
                                                                                                                                                                                               1.00%
                                                                                                                                                                                               0.80%
       $4,000,000
                                                                                                                                                                                               0.60%
       $3,000,000                                                                                                                                                                              0.40%
                                                                                                                                                                                               0.20%
       $2,000,000
                                                                                                                                                                                               0.00%
                                                                                                                                                                                               -0.20%
       $1,000,000
                                                                                                                                                                                               -0.40%
              $0                                                                                                                                                                               -0.60%




                                                                                                              Dec-07




                                                                                                                                                  Dec-08




                                                                                                                                                                                      Dec-09
                                      Dec-05




                                                                          Dec-06
                                                                 Sep-06




                                                                                                     Sep-07




                                                                                                                                         Sep-08




                                                                                                                                                                             Sep-09
                             Sep-05
                    Jun-05




                                                        Jun-06




                                                                                            Jun-07




                                                                                                                                Jun-08




                                                                                                                                                                    Jun-09
                                               Mar-06




                                                                                   Mar-07




                                                                                                                       Mar-08




                                                                                                                                                           Mar-09
                                               DIF Insured Deposits $Mn (LHS)                                           DIF Reserve Ratio (RHS)

As the report clearly explains, the sluggish global recovery (if any) still has a great impact on the
banking sector and especially the small- and mid-sized institutions that still seem to operate in a
tail-spin environment. With refinancing periods approaching in both the private residential and
commercial real estate market anticipate further banking failures, maybe even at an increased
pace than seen over the last year.


You can find the full report here.




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