Banks Are Mending Very Slowly

 | May 07, 2014 | 5:00 PM EDT
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The bank call reports for the first quarter have been filed. In this column I'll address some notable issues that concern the industry in total. On Thursday I'll review the specifics of the money centers: JPMorgan Chase (JPM), Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC).

Total loans outstanding in the U.S. banking system increased by $37 billion in the first quarter, to $7.930 trillion, from $7.893 trillion. On the bright side, this was the first time in the past three years that there was an increase in total loans in the banking system from the fourth quarter to the first quarter. In the first quarters of 2013 and 2012, the reductions were $37 billion and $63 billion respectively.

The largest increase was again in the commercial and industrial loan (C&I) sector, which moved up by $15 billion. This sector has increased every quarter since the last recession ended. When long-end yields popped up last summer, it appeared as though the cost of C&I loans would rise too, as I discussed last August

Instead, the borrowing costs for C&I loans declined, evidenced in lower spreads to the fed funds rate.

As consumer loan rates rose, causing loan origination in that sector to decline, banks offset this by offering lower rates to commercial borrowers. But there is still scant evidence of the proceeds of these loans being put to work for productive purposes.

For the sixth consecutive quarter, the number of bank-held residential, single-family dwelling (SFD) mortgages declined. From the fourth quarter of 2013 to the first quarter of 2014, the decline was about $3 billion to $1.74 trillion, which is back to about where it was three years ago.

The slowdown in housing is of significant economic consequence, because it has historically been both the largest contributor to consumer spending and the principal driver of non-housing-related consumption.

The slowdown in the purchase of single-family dwellings and mortgage originations for the purchase of them was slightly offset by an increase in the multi-family residential property (apartment buildings) loan sector for the 12th consecutive quarter. The increase in the first quarter was about $9 billion, to $272 billion, from $263 billion. The multifamily loans sector, however, is only about one-seventh the size of the loan market for single-family dwellings. 

Bank-held nonperforming residential loans continued to decline in aggregate: The dollar value of them in the first quarter fell by $9 billion, to about $121 billion. This is good news, but at the rate of resolution of the past five years it would take another decade for banks to return to the level of nonperforming loans as a percentage of all loans that was the norm before the housing bubble formed in the mid-2000s.

At the height of the crisis, about 11% of all bank-held residential mortgages were in default. In the past five years, that has only declined to about 7%. A normal rate is less than 1%. So this is still a massive issue for the banking industry and for the economy and regulators.  

A bright sector is construction-and-development loans, which have experienced an increase for the fourth consecutive quarter, increasing to about $214 billion from $209 billion in the fourth quarter of 2013.

The construction-and-development loan sector represented about 8% of all bank loans at the height of the housing boom. It's now about 2.7%, stabilizing and tentatively growing again.

Since subprime auto loans became available again in 2011, the value of auto loans held by banks has increased every quarter. Interesting, too, is that similar to the C&I loan rates falling to offset the increases in consumer rates, auto loan rates have been in a steady decline as banks have increased competition for them. The average auto loan yield is now 4.74%. By comparison, that's just slightly more than the average residential mortgage yield of 4.10%. 

One of the worrisome issues for investors in any bank is the steady decline in interest income in the industry. In aggregate, bank interest income declined again by about $3 billion, to $116 billion in the first quarter, from about $119 billion in the fourth quarter of 2013.

All told, the first-quarter bank call reports indicate a banking sector that is mending but still at a glacial pace. 

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