The banking industry's loan losses could stay elevated for years, recent federal data suggests, even after appearing to peak in late 2009.
Banks' chargeoffs narrowed for the second quarter in a row in the April-June period, according to the Federal Deposit Insurance Corp. and Federal Reserve. That bolsters a view among many analysts and investors that losses may have stopped rising permanently in the fourth quarter.
But no one is celebrating that positive development just yet. It took two years for banks' loan losses to fall from peak levels after the recession of the early 1990s. It could take even longer this time around, given the depth of this cycle and ongoing problems in the real estate market, industry watchers said.
"If home prices don't stabilize, how can we be sure that chargeoffs have peaked?" asked David Dietze, chief investment strategist with Point View Financial Services Inc. in Summit, N.J.
"At best, we're going to be in for a long slog. At worst, [the data is] forecasting another material dip down. My guess is that that there is another round of chargeoffs."
Market watchers have been scouring recent regulatory updates on banks to determine whether the first half of the year was the beginning of a recovery.
Though the early reads are mixed, there's a case to be made that it was, with loan losses industrywide having fallen for six months straight. The industry's total losses narrowed 6.5% from the prior quarter and 0.4% from a year earlier to $48.96 billion at June 30, according to the FDIC's quarterly update on the banking industry, released Aug. 31. The second quarter was the first time in more three years that banks lowered chargeoffs year-over-year.
That data jibes with recently released Federal Reserve data showing the industry's chargeoff rate fell for the second straight quarter, to 2.79% in the second quarter from 2.88%.
"I think it peaked," said Jamie Cox, managing partner at Harris Financial Group in Colonial Heights, Va.
Jason Goldberg, an analyst with Barclays Capital, agreed that losses are improving. But they're still awful by historical standards and could stay that way for a while with the unemployment rate hovering at 9.6% and existing home sales falling 27% in July.
"Ultimately, banks are a reflection of the economy," Goldberg said. "While credit quality is improving, it's not a straight shot to better results. There could be some fits and starts along the way."
The second quarter's chargeoff rate was the fourth highest on record since regulators began tracking such data in the 1930s, he said. Only the three prior quarters were worse.
In the savings and loan crisis, the industry's chargeoff rate peaked at 1.9% in the fourth quarter of 1989. That cycle's second-highest quarterly chargeoff rate didn't come for a full two years. Goldberg said that shows that recoveries can be lengthy and volatile. Data collected from banks' filings with the Federal Reserve indicate that this one could be both, he said.
Losses rose last quarter in commercial real estate even though they fell in other areas like residential real estate and equipment leasing, he said.
BB&T Corp., SunTrust Banks Inc., Regions Financial Corp. and Synovus Financial Corp. have large bundles of commercial real estate loans outstanding in hard-hit regions across the South, Goldberg said, but their CRE chargeoff rates have been relatively low in comparison to chargeoffs in other portfolios like acquisition and development loans. It's likely that these companies are delaying taking inevitable losses.
Banks have also been busy selling and modifying loans, he said. That could be making loan portfolios appear healthier than they are. Most modified loans tend to go bad over time; but banks can reclassify a past-due loan as performing after it is modified and shows a history of payments under the new terms.
Nonaccrual loans fell in the first quarter at 17 of the 26 large and midsize banks Goldberg covers; renegotiated loans, meanwhile, rose at 19 of them. Bank of America Corp. Citigroup Inc., Fifth Third Bancorp. and PNC Financial Services Group Inc., among others, reported lower nonaccruals and higher renegotiated loans.
Loan sales also may be skewing the numbers, he said. Banks he covers sold $5.03 billion nonaccrual assets in the quarter, about $1.23 billion more than the prior one. Elevated unemployment and slower home sales could sap demand for nonaccrual assets in the second half of the quarter, he said.