The market seems to have factored in most negative elements in relationship to the major banks, but there is a lot to come this year for regionals, and the strongest of them at this time according to Fitch ratings include U.S. Bancorp (NYSE:USB), New York Community Bank (NYSE:NYB) and PNC Financial Services (NYSE:PNC).
Even though major problems remain at larger financial institutions, they are different than the risks involved with their regional cousins, which this year will be the depth of commercial loan defaults, which the regional banks are much more exposed to.
The reason the three banks mentioned above are considered stronger positioned are the outlook for their financials is better than their competitors, and probably most importantly, in the short term, they carry a higher quality of assets in their portfolios, which will determine the performance, and in some cases, probably the survival of some of the struggling regionals.
It can also seem to imply that the rest of the banking industry is doing good as well, and that is even farther from the truth, as their strongest test is about to come upon them in the next year or so concerning the quality of the commercial loans they originated and still hold.
Interestingly, in spite of the idea there is a lot of progress going forward in the consumer banking market, according to Fitch, they see it getting worse in 2010 as it goes along, and with re-sets about to explode on the industry, that is probably true. Re-sets haven’t been in the news much in the recent past, but they are a real force on the consumer side which has yet to be dealt with, but we are in the midst of right now.
Mortgages aren’t the only concern in this sector either according to the Fitch report, as home equity loans and credit cards continue to be a major problem and they should grow in defaults into 2011, which will continue to put downward pressure on bank earnings for the next year or more, depending on how deeply the problems go.
Although there has been a general, slight improvement in some of the underlying banking industry fundamentals, Fitch still has a negative outlook for the industry in place until these problems truly work their way out of the system.
Another long term factor I will add, is much of what is being touted as mortgage modifications and such are risky in and of themselves, with many thinking it could backfire if after that is done a large percentage of homeowners still stop paying or walk away from their homes. In that case, there is no medicine to deal with the situation when there is no will to want it to be.
The bottom line to me is everything is still up in the air in the banking sector, and it won’t be until the end of 2010 or the beginning of 2011 where we will see how much carnage there really is. Re-sets and commerical loans are the challenge this year, and we’re just in the beginning of those problems happening, with the latter part of 2010 being the commercial loan default time frame.
For regional banks, we’re about to see their period of reckoning and the fallout from the commercial loans they originated. It could devastate those with poor assets on their books.
