This is the fourth and final article that I have written exclusively for Business Insider regarding the Banking Industry.
The first three articles of my series looked at Banking Industry losses, loan write-offs, and loan performance both historically and since the beginning of our most recent financial crisis.
This article will show the changing nature of the Banking Industry’s “asset” configuration over the past eighteen years, then show how that configuration has been particularly changing since the beginning of the financial crisis and particularly since the initiation of the Federal Government’s infamous TARP program.
To begin, Exhibit 1 shows how the mix of the four major assets categories of cash, loans, securities, and other assets that somewhat define the Banking Industry has changed over time. Note that “prior” to the beginning of our current financial crisis (2007) the asset mix trend showed the Banking Industry holding a fairly consistent level of loan assets (60%), while declining their mix of securities and cash and compensating that decline with growth in the “other” asset category.
Photo: Jim Boswell
Note now also from the above exhibit that the asset mix trends have changed somewhat significantly from that prior period mentioned above. Since the beginning of our most recent crisis, the asset mix of the Banking Industry shows: (1) a declining mix of loan assets; (2) a declining mix of “other” assets; and (3) an increasing mix in both the “securities” and “cash” asset categories. To investigate these more recent changes, we will now turn our attention and focus specifically at the changes over the last nine quarters (or in other words since the initiation of TARP to the present).
As a baseline for future reference, the reader should know that Total Banking Assets have changed very little since TARP, increasing by less than $ 0.1 Trillion to the current amount of $13.83 Trillion. Exhibit 2 shows the actual dollar amount for each of the last 10 quarters by major banking industry asset categories.
Photo: Jim Boswell
Based upon this exhibit and related detail, Quanta Analytics (QA) interprets these changes in the following manner:
Unsurprisingly, yet clearly, the Banking Industry has “retrenched” since the beginning of the Financial Crisis. Some of the changes we see are due to “loan asset cleanup” as addressed in Parts I and II of this series of articles; some are due to new regulatory constraints put on the banking industry; and some are due to a much more “risk adverse” and conservative lending strategy used by the banks compared to pre-crisis periods.
QA finds the fact that Cash Assets have nearly “doubled” to $1.0 Trillion and have remained there since the crisis began rather surprising, if not shocking, considering the general complaint that banks are not issuing “new loans” and since most of the TARP funds that were borrowed (and probably resulted in the cash influx seen in the first two quarters of Exhibit 2) are now being reported as having been paid back.
QA views the decline in Loan Assets as being consistent with bank losses, write-offs, and principal pay downs through normal amortization, but can only conclude or support the interpretation that that few “new” loans are being originated “internally” through the banks since the crisis began.
QA views the increase in Security assets since our financial crisis began as an example of the Banks own general “flight to safety”, increasing their commitment for new loans through the purchase of Government guaranteed securities rather than through their own internal lending organisations—whose time is being spent seemingly more on “cleanup” than new loan origination.
And finally, QA views the decrease in the “Other” asset category (made up of such things as reverse repurchase agreements, trading accounts, and goodwill) as a generally good trend that is likely tied to new regulatory restrictions and increased regulatory oversight.
If you look at the above four asset categories in more detail, which QA did, you will discover that the decline in loan assets took place primarily in the real estate and commercial area of their lending practices. Individual credit card lending has actually increased over the past 10 quarters from $0.4 Trillion to $0.7 Trillion, primarily as a result of a spike immediately following the winter holiday period of 2009. It is too early to tell whether a similar spike will take place as a result of 2010 holiday spending, but we will be watching.
The banks offset the decline in loan assets mentioned above by increasing their purchase of Government-issued securities (i.e., Treasuries, but mostly Ginnie Mae-issued securities). The amount of Fannie Mae and Freddie Mac pass through securities that the banks held declined over the last 10 quarters.
This is consistent with a “flight to safety” and one of the better kept secrets in the security business, and that is this: the true Government-run programs (FHA, VA, and Ginnie Mae), having not played in the risky lending game of the banks and their pseudo-governmental agencies (Fannie and Freddie), were available to pick up the lending slack as the demand for “valid loan refinancing” helped keep our economy going immediately after our financial crisis began.
Now with this asset review and the other findings presented in earlier parts of this series on the banks, I would like to end my four-part series with the following statements.
Things are not as bad for the banking industry as the doomsayers say they are. In truth, they never were. The worst of the banking crisis is over. In fact, QA feels that the banks are now somewhat in the same position as the whole of U.S. business. Overall things might be better for the banks, but the banks are far from being in “critical” condition. Cash is aplenty. Loan portfolios are in fact getting cleaned up. And believe it or not, the banks are showing signs of being smarter today than they were yesterday—as we all are.
Yes, there are still things to fix—the Federal Budget deficit, our national debt, rising health care costs, abhorrent federal, state and local pension plans, but unlike the doomsayers, QA sees no better time than the present to start “investing” in American business again. It’s long past time that we start putting our “unemployed” back to work—so let’s start using that “stored up cash” we have been setting aside and start investing in business rather than gold.
Now with that being said, I would like to wish every one a Happy New Year with the clear and objective confidence that 2011 is going to be the year that the United States begins standing on its own two feet again, as we continue to supply even more valued products and services to the rest of the world—charging onward and upward ahead.
As before, if anyone is interested in seeing more details relating to the above asset analysis, simply email me using the email address of my BI profile and ask for the PowerPoint presentation that is associated with the analysis.
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