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TMFJMo (< 20)

Banks, Problems And Profits

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May 21, 2010 – Comments (0)

Pretty interesting article in the paper this morning on problem banks.  Some quick snippets:

*Today roughly 10% of the U.S. banking industry considered “problem” institutions.

*Total number of loans at least three months overdue grew for the 16th consecutive quarter.

*So far this year FDIC has shut down 72 banks, more than double the amount closed at this time last year.

Some takeaways from this for me are (possibly surprisingly enough) quite positive to be honest, and I’ll tell you why.  First, it appears to me that the FDIC is trying to get a little more ahead of the problem now as opposed to “hoping” it will get better.  I think that Sheila Bair has done a considerable job given the situation.  Now the statistic that loan balances grew at least 3% over the quarter is misleading.  Due to a new accounting standard that requires banks to bring securitized loans back on their balance sheets, banks consequently are seeing their loan portfolios “growing” again.  So these are not new loans per se, they are old securitized assets that they now have to acknowledge.  Without this accounting standard, lending too fell for the 7th straight quarter.  Can you imagine what it is going to look like when rates go up?  The article mentions the banks’ profitability over the quarter as being the highest since the first quarter of ’08.  Now I will give them this as it is in fact correct, however what we need to keep in mind is that the overwhelming majority of this profitability came from the banks’ investment portfolios, not their loan portfolios.  We need to keep this in mind, especially given today’s current market conditions.  If we truly are in the middle of a correction, then we may very well see a significant drop in their profitability for some quarters to come.  Understand I am just throwing that possibility out there.

So where is the optimism?  Well, the way I see it we are in the middle of a significant correction.  What that means for me (and hopefully Fools everywhere) is that there are going to be some wicked buying opportunities coming up here real soon.  As I write the DOW has now slipped back below 10,000…ah the turmoil...I remember it like it was yesterday. 

Remember, you aren’t going to make a fortune in a day.  But you can certainly take days like these when the market is getting hammered and set yourself up to make a fortune over the course of your lifetime.

Stay Fool,

JMo   

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