FREDERICK, Md. — While the fourth
quarter 2008 was tough for the banking industry, the financial conditions of
commercial banks and savings and loans are expected to further deteriorate in
2009 and the first part of 2010, according to Barron Putnam, president of LACEFinancial Corporation, a provider of credit rating services.
LACE predicts that
second quarter 2009 GDP growth will be close to the negative 6.2 percent
reported in the first quarter; with a likely overall negative three percent
growth for the year.
"Unemployment
is likely to approach and possibly exceed 10 percent this year. The devastating
decline in U.S. household wealth ($11 trillion), increasing non-performing
assets in the world's banking systems, rising unemployment, deterioration in
U.S. corporate wealth, as well as a deteriorating economic condition in our
nation's largest trading partners, will prolong the U.S. recession,"
predicted Putnam.
"Although world
governments are injecting capital into their banking systems, this, by itself,
will not increase new lending," he explained. "You can't 'push a
string,' there has to be loan demand. Currently, banks are more concerned about
their increasing non-performing assets and their survival. So far this year 20
banks have failed, and we expect about 100 to 150 failures by the end of
2009."
In its
"Trends in U.S. Banking Institutions -- Fourth
Quarter 2008" report, LACE found that loan loss reserves and trading
losses contributed to last year’s financial problems.
The report noted
that commercial banks reported a net loss of $32.1 billion, resulting in a
negative 0.94 percent return on assets (ROA). Although four banks accounted for
half of the loss, 33 percent of all banks reported a loss for the quarter.
The report also
found that assets for the banking industry remained stagnant despite an
increase in deposits. Assets growth declined 2.8 percent for the fourth quarter
and .04 percent for the year despite the government's infusion of capital into
the banking system. Meanwhile, deposits grew 3.5 percent in the fourth
quarter.
Non-performing
assets increased by $44.1 billion (24 percent) across all loan categories. Provisions
for loan loss reserves increased $69 billion, more than twice the amount
reported in the same period a year ago. Charge offs against the loan loss
reserve account were $37.9 billion, a 132 percent increase over the same period
a year ago.
Net reserves for
commercial banks increased $16.5 billion, but the higher increase in
nonperforming assets resulted in a coverage ratio (non-performing assets to
reserves) decline from 84 to 75 percent, a 16-year low. "We expect the
coverage ratio to decline further over the next 12 months, putting a
significant strain on bank earnings," said Putnam.
The results from
LACE’s report indicate that 2009 will continue to be a difficult year. "We
expect little or no loan growth for this year, and without loan growth there
will be little or no economic growth," explained Putnam.
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