FBR has compiled a scorecord for regional banks and thrifts evaluating the sector’s performance compared to both expectations and previous quarters. The bottom line? Asset quality and profitability continued to deteriorate, but at a reduced rate and less than had been forecast.
Non-performing assets as a precent of loans rose to 1.41% from 1.15% in the previous quarter. EPS growth also suffered, falling 8.8% on average. But FBR was most concerned over reserve builds, or rather, the lack thereof:
The reserve build continues to disappoint investors’ desire to see more cushion. For the industry, profitability is still overstated, given the strong need to boost reserve levels and the fact that NCOs [net charge-offs] are becoming detached from NPA [non-performing assets] levels (which could drive a snap-back effect down the road). Although we still believe that many companies in the industry are overvalued relative to risk, with the sharp decline in June and early July, we are beginning to sniff around for the proverbial baby thrown out with the bathwater.
The good news is that as bad as things are, they are better than many thought they would be. Median EPS for the sector, though it did decrease year-over-year, beat analyst expectations by 1.3%, not stellar, but it’s better than a miss. Net interest margin rose, and borrowing costs are down.
Though profitability managed to hold up, FBR is concerned about a further deterioration in credit quality down the road:
The median level of NPAs/loans of 1.41% is the highest since 4Q92 (from 3Q90–1Q92, the median NPAs/loan ratio for the industry was above this level). Although housing-related credits still dominate the conference calls, several companies have begun to show signs of weakness in commercial
and industrial (C&I) loans, a risk we have discussed since November 2007 and the topic of our June 17 report. We expect this trend of deterioration to continue through the end of FY08, reflecting further weakness in regional housing markets and general economic conditions.