Problem loans continue to rise
Regulatory call report data from 4Q09 support our view that this credit cycle will
be more protracted than many investors anticipate. Problem loans continue to
increase across most product categories, with trends in resi and comm’l real estate
most troubling. We see no reason to alter our outlook for a few more quarters of
accelerating losses, and a slower decline from peak levels in ‘11 and beyond.
Regulatory Data Suggests Protracted Cycle
Regulatory call report data from 4Q09 support our view that this credit cycle
will be more protracted than many investors anticipate. Problem loans continue
to increase across almost all product categories, with trends in residential and
commercial real estate most troubling. We see no reason to alter our outlook for
several more quarters of accelerating losses, and a slower decline from peak
levels in 2011 and beyond. As a result, we forecast meaningful earnings misses
(46% and 33% in 2010 and 2011), and a slower recovery to “normalized” EPS
(likely 2014 and beyond versus current expectations of 2012). We found credit
trends at WFC and PNC most concerning in our large-cap universe, and ASBC
in our mid-cap universe – although ASBC’s new CEO likely executed a “cleanup”
upon arrival which drove a meaningful increase in problem loans.
Total problem loans (30-89 days past due, 90 days past due and non-performing
loans) for the median regional bank under our coverage increased 6bp
sequentially to 625bp (see Chart 1). All categories except second lien
residential real estate and construction posted increases. We detail trends by
product type throughout the remainder of this report.
While this rate of change slowed from a 59bp sequential increase in 3Q09, we
believe several factors are skewing this data, including:
(1) First lien problem loan migration decelerated, primarily due to an
acceleration in loan modifications as opposed to a real improvement in
(2) Second lien problem loans declined, but we believe modifications may be
skewing trends in this product as well.
(3) C&I problem loan migration decelerated from the previous quarter, but the
Shared National Credit exam and seasonality likely skewed quarter-overquarter
comparables.
In our large-cap universe, WFC, PNC and STI maintain the highest level of
problem loans, while WFC, USB and BBT posted the greatest sequential
increase (see Chart 2). In our mid-cap universe, FHN, HBAN and SNV
maintain the highest level of problem loans, while ASBC, CYN and TRMK
posted the greatest sequential increase.
Regional Banks
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