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Smaller banks face fresh wave of losses Print E-mail
Thursday, 06 August 2009

By Ronald Fink

Losses from construction loans are about to hit smaller, regional banks, according to research published today.

Unlike other types of financing, construction loans are typically structured with upfront reserves, which have kept those loans from following others in the real estate sector that have gone bad. And in contrast to mortgages, these types of loans have been made primarily by smaller banks.

But with the upfront reserves nearly exhausted, analysts expect a wave of construction loan defaults to wash over these institutions.

“Construction loans will be the epicenter of bank loan problems,” a Deutsche Bank analyst was quoted as writing today on the website The Big Picture. (The report itself was not available to the public.)

The rising delinquencies are reflected in another research report on 150 banks that was put out today by KBW. For the 36 banks that provided commercial real estate loan asset quality data for the second quarter, the firm found that the overall ratio of non-performing loans had risen by 258 basis points from a year earlier, to 408 bps, and was 120 basis points higher than at the end of the first quarter.

Other segments of commercial lending also deteriorated, KBW found. For the 35 banks reporting the credit quality of commercial and industrial loans, the overall ratio of non-performers stood at 225 basis points, up 138 basis points from a year earlier and 50 basis points from the first quarter.

While capital levels at larger banks improved during the quarter, 60% of large banks and 59% of small ones missed consensus earnings estimates during the second quarter, KBW noted.

“Asset quality deterioration continues,” the analysts noted.

KBW found one bit of good news, at least for larger banks: Their capital levels rose, with the median tangible equity to assets ratio up 86 basis points from the first quarter and 31 basis points from a year earlier, to 6.77 percent, thanks to financing activities such as exchange and tender activity and equity issuance.


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