'Regulators shut banks in California, Maryland, and Minnesota'
'Regulators shut Guaranty Bank - 2nd largest failure'
'Regulators shut down 2 Arizona banks'
Hardly a day passes without news like the above hitting the headlines. The Federal Deposit Insurance Corporation has been busy taking over troubled banks and easing rules to facilitate bank buyouts.
The number of banks on the FDIC's confidential 'problem list' has risen from 305 in the first quarter to 416 at the end of June, the highest since 1994.
Does this mean you should avoid investing in banks?
Not entirely. Why?
When you look at the big picture, problem banks are not a major problem. Most of the troubled banks on the FDIC list are smaller firms with assets totaling about $300 billion. In comparison, just two of the largest bank holding companies, JP Morgan Chase (
JPM) and Bank of America (
BAC), have more than $4 trillion in assets.
Additionally, there are a few positives worth noting.
Positives
Expanding Margins
Banks are experiencing solid deposit growth, even after slicing interest rates on deposits. They are also keeping a tight rein on operating costs. Banks are taking additional measures to boost margins as well. Wells Fargo (WFC) is expanding its net interest margin by rolling $14 billion of assets in high-yield CDs it retained from the Wachovia acquisition into lower-interest bearing accounts.
Long-term Benefits from Consolidation
The credit-crisis coupled with government intervention has enabled survivors like JP Morgan, Bank of America, and Wells Fargo to acquire distressed institutions at bargain prices. These acquisitions offer the potential to payoff in the long term through growth in trading and investment banking activities as confidence in financial markets improves.
Encouraging Signs in Loan Losses and Loan Growth
The delinquency rate on very-short term loans declined during the second quarter. As a leading indicator of credit problems, improvement here is encouraging. Prodded by the government, banks are getting receptive to lend. Banks like Credit Suisse (CS) and SunTrust (STI) are reaching out to clients to provide financing.
