The fourth quarter of 2008 was not so good for the banking industry, and the financial conditions of commercial banks and savings and loans is expected to further deteriorate for the rest of 2009 and the first part of 2010, according to LACE Financial Corp.

The fourth quarter of 2008 was not so good for the banking industry, and the financial conditions of commercial banks and savings and loans is expected to further deteriorate for the rest of 2009 and the first part of 2010, according to LACE Financial Corp., which provides credit rating services on approximately 19,000 domestic and international financial and related institutions.
 
According to LACE, the second quarter 2009 gross-national-product growth will be close to the negative 6.2 percent reported during the first quarter of the year, with a likely overall negative 3 percent growth for the year.
 
"Unemployment is likely to approach and possibly exceed 10 percent this year," said Barron H. Putnam, Ph.D. and president of LACE. "The devastating decline in U.S. household wealth ($11 trillion), increasing non-performing assets in the world's banking systems, rising unemployment, deterioration in U.S. corporate wealth, as well as a deteriorating economic condition in our nation's largest trading partners, will prolong the U.S. recession."
 
So far this year 20 banks have failed, and Putnam says he expects between 100 to 150 failures by the end of 2009.
 
According to LACE's "Trends in U.S. Banking Institutions — Fourth Quarter 2008" report, commercial banks reported a net loss of $32.1 billion, resulting in a negative 0.94 percent return on assets. Although four banks accounted for half of the loss, 33 percent of all banks reported a loss for the quarter. 
 
"The losses were driven primarily by very high provisions to loan loss reserves, substantial losses in trading accounts and large write-downs in goodwill," Putnam said.  
 
For 2008, net income was $10.2 billion, down 90 percent from 2007. The FDIC reported that the industry ROA was .08 percent, the lowest since 1987. 
 
"Losses could have been worse," Putnam said, "because the effects of failures and purchase accounting were excluded from the income figures."
 
Assets for the banking industry grew 2 percent from the third to the fourth quarter and a total of 6.3 percent for 2008, according to the LACE report.
 
"We expect little or no asset growth for 2009," Putnam said. 
 
Growth declined 2.8 percent for the fourth quarter and .04 percent for the year despite the government's infusion of capital into the banking system. 
 
"We also expect little or no loan growth for this year, and without loan growth there will be little or no economic growth," Putnam said.
 
Meanwhile, LACE reported that banks are flush with deposits, which grew 3.5 percent in the fourth quarter. Domestic interest-bearing deposits grew 4.2 percent, brokered deposits grew 15.3 percent and deposits in foreign offices grew by 2.2 percent. This is the highest quarterly deposit growth in 10 years.
 
Increases in non-performing assets expected
 
For the fourth quarter of 2008, provisions for loan loss reserves increased $69 billion, more than twice the amount reported in the same period a year ago. Charge-offs against the loan loss reserve account were $37.9 billion, a 132 percent increase over the same period a year ago. Net reserves for commercial banks increased $16.5 billion, but the higher increase in non-performing assets resulted in a coverage ratio (non-performing assets to reserves) decline from 84 percent to 75 percent, a 16-year low.
 
"We expect the coverage ratio to decline further over the next 12 months, putting a significant strain on bank earnings," Putnam said. 
 
The FDIC reported that in the fourth quarter of 2008 more than two-thirds of the increase in non-performing loans came from loans secured by real estate, with construction and development loans having the highest non-performing rate at 8.51 percent.
 
Total equity capital for the banking industry declined .8 percent ($52.1 billion) in the fourth quarter because of write-downs in goodwill and other comprehensive income. Tier One leverage capital increased 2.3 percent ($22.8 billion) and total regulatory capital increased by 2.2 percent ($28 billion). Banks are trying to protect their capital base by reducing dividends; more than half of the commercial banks reduced dividends in 2008.