Moody's: Banks Still Need To Take Writeoffs Worth More Than They've Earned Since 2006

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Photo: Associated Press

Credit ratings firm Moody’s believes that banks have recognised the majority of their bad loans already, with $476 billion of losses already recognised.Still, banks have another $268 billion in bad loans which to be written-off by 2011 according to the firm. This is partly because only 68% and 49% of residential and commercial real estate loan losses have been recognised so far.

So… we’re past the peak of banks’ write-offs (which create losses on their income statements).

But… $268 billion is an enormous figure for future write-offs regardless.

To put the remaining unrecognised bad loans in perspective, $268 billion is nearly equal to the profit earned by all FDIC-insured U.S. banks since the beginning of 2006 according to the FDIC’s latest Quarterly Banking Profile. (The FDIC reports U.S. banks as having collectively earned $277.8 billion from Q1 2006 through Q2 2010).

Furthermore, Moody’s expected write-offs could rise should the global economy worsen later this year, which Moody’s believes has a 20 – 30% chance of happening.

Now there’s likely some mismatch between Moody’s universe of banks and those covered in the FDIC’s quarterly banking report, but, essentially, once accounting for the expected further recognition of $268 in bad loans, then U.S. banks probably haven’t earned much since the beginning of 2006.

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