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Quanta Analytics Financial Crisis Accounting of the Banking Industry Part III Analysis of Banking Industry Assets And Their Changing Nature.

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Presentation on theme: "Quanta Analytics Financial Crisis Accounting of the Banking Industry Part III Analysis of Banking Industry Assets And Their Changing Nature."— Presentation transcript:

1 Quanta Analytics Financial Crisis Accounting of the Banking Industry Part III Analysis of Banking Industry Assets And Their Changing Nature

2 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com History of Banking Industry Assets In earlier parts to the Quanta Analytics analysis of the financial crisis and banking industry we looked at: (1) the amount of losses the banks have absorbed due to their lending mistakes (Part I); and (1) the amount of losses the banks have absorbed due to their lending mistakes (Part I); and (2) how the portfolio of banking industry loans have and are currently performing by loan category (Part II). (2) how the portfolio of banking industry loans have and are currently performing by loan category (Part II). In Part III we are going to investigate the Asset side of the banking industry financials and see what we can decipher from that view. First, we will look at how banking industry assets grew from 1992 through to the present time and then we will focus on how the mix of banking industry assets have changed since the Financial Crisis first began to come into the publics focus, which we consider to be between the 2 nd and 3 rd Quarter of 2008. The analysis in this section will begin with a high level accounting for assets (i.e., cash, loans, securities, other), then we will break those asset categories down into sub-categories as the data permits or warrants. As a starting pointthe next graph will show the eighteen year trend of the four major asset categories (Cash, Securities, Loans, and Other) that will make up our analysis. Before beginning, QA believes that it is worth noting how banking assets grew steadily up until the Financial Crisis and how they have somewhat stagnated since that time. And although it is just one point on the following graph, QA would like to also point out the $0.5 step jump in 2008which if you look at the graph closely was a result of an influx of $0.5 Trillion in Cash, which QA assumes was associated with TARP funding. Later graphs will focus specifically on the banking asset changes since that influx.

3 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com History of Banking Industry Assets (1992 – 2010)

4 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com History of Banking Industry Assets The next graph uses the information presented in the previous graph and shows how the relative mix of the four major asset categories (Cash, Securities, Loans, Other) have changed over time. Because the analysis in this Part III of our Banking Industry Analysis will focus primarily on the asset changes in the last nine quarters since the 2 nd Quarter of 2008, we would like to point out some of the overall general trends. Prior to 2008, the trend in banking assets followed this general pattern: (1) loans represented a fairly steady 60% of all banking assets; (1) loans represented a fairly steady 60% of all banking assets; (2) the relative amount assets held as cash and securities tended to follow a general downward trend; and (2) the relative amount assets held as cash and securities tended to follow a general downward trend; and (3) those downward trends were compensated by increases in the other asset category (3) those downward trends were compensated by increases in the other asset category Since 2008, the trend in banking assets have followed this pattern: (1) loans represent a smaller relative percentage of banking assets; (1) loans represent a smaller relative percentage of banking assets; (2) the amount of cash and security assets have risen; and (2) the amount of cash and security assets have risen; and (3) the amount of other assets have dropped as a relative percent. (3) the amount of other assets have dropped as a relative percent.

5 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com History of Banking Industry Assets as a Percent of Total Assets (1992 – 2010)

6 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com History of Banking Industry Assets Since the Beginning of the Financial Crisis (2 nd Qtr 2008 to the Present) As we move forward with our more detailed analysis of the changes in banking industry assets relating to the Financial Crisis, QA will use a similar 3-graph configuration to show and explain the changes that have been occurring. The first graph of each 3-graph series will show how banking industry assets have changed since the 2 nd Quarter of 2008 to the latest reported quarter (3 rd Qtr 2010) as a stacked bar graph. The second graph of each 3-graph series will present a more clear picture of how each of the main asset categories we are investigating have been changing quarter by quarter since the Financial Crisis began. The third graph of each 3-graph series will simply show the overall change in asset category since the crisis began (or since pre-TARP). As you look at the details presented throughout this analysis, it is important to remember two major benchmark points: two major benchmark points: One: As of the last quarter (09/30/2010) the Total for all Bank Assets = $13.4 Trillion And Two: Since the 2 nd Qtr of 2008 (pre-TARP) Total Bank Assets have increased by only $ 0.1 Trillion

7 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com List of Asset Categories That Will Be Reviewed Showing current portion of $13.4 Trillion of Total Assets in Parenthesis Cash ($ 1.0 T) Cash ($ 1.0 T) Loans ($ 7.1 T)* Loans ($ 7.1 T)* Real Estate Loans ($ 4.3 T) Real Estate Loans ($ 4.3 T) Single Family ($ 2.5 T) Single Family ($ 2.5 T) Commercial ($ 1.1 T) Commercial ($ 1.1 T) Construction ($ 0.4 T) Construction ($ 0.4 T) Multifamily ($ 0.2 T) Multifamily ($ 0.2 T) Farmland Other ($ 0.1 T) Farmland Other ($ 0.1 T) Commercial Loans ($ 1.2 T) Commercial Loans ($ 1.2 T) Individual Loans ($ 1.3 T) Individual Loans ($ 1.3 T) Credit Cards ($ 0.7 T) Credit Cards ($ 0.7 T) Other Individual ($ 0.6 T) Other Individual ($ 0.6 T) Farmland Loans ($ 0.1 T) Farmland Loans ($ 0.1 T) Other Loans ($ 0.5 T) Other Loans ($ 0.5 T) * Loan Loss Allowances of $ 0.3 Trillion explain the discrepancy in Total Loans and subtotals Securities ($ 2.7 T) Securities ($ 2.7 T) U.S. Government Securities ($ 1.7 T) U.S. Government Securities ($ 1.7 T) Treasuries ($ 0.2 T) Treasuries ($ 0.2 T) Non-Mortgage ($ 0.2 T) Non-Mortgage ($ 0.2 T) Fannie/Freddie Mortgage Pass Throughs ($ 0.6 T) Fannie/Freddie Mortgage Pass Throughs ($ 0.6 T) Ginnie Mortgage Pass Throughs ($ 0.2 T) Ginnie Mortgage Pass Throughs ($ 0.2 T) CMOs ($ 0.4 T) CMOs ($ 0.4 T) Other ($ 0.1 T) Other ($ 0.1 T) State and Local Securities ($ 0.2 T) State and Local Securities ($ 0.2 T) Domestic Securities ($ 0.5 T) Domestic Securities ($ 0.5 T) Foreign Securities ($ 0.3 T) Foreign Securities ($ 0.3 T) Other Securities ($ 0.0 T) Other Securities ($ 0.0 T) Other Assets ( $2.6 T) Other Assets ( $2.6 T) Fed Funds Sold & RRAs** ($ 0.4 T) Fed Funds Sold & RRAs** ($ 0.4 T) Trading Accts ($ 0.8 T) Trading Accts ($ 0.8 T) Bank Premises ($ 0.1 T) Bank Premises ($ 0.1 T) REO ($ 0.1 T) REO ($ 0.1 T) Goodwill/Intangibles ($ 0.4 T) Goodwill/Intangibles ($ 0.4 T) All Other Assets ($ 0.8 T) All Other Assets ($ 0.8 T) ** RRAs = Reverse Repurchase Agreements

8 Changing View of Banking Industry Assets by Major Category (Cash, Loans, Securities, and Other) Since TARP

9 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com History of Banking Industry Major Asset Categories Since TARP (2 nd Qtr 2008 thru 3 rd Qtr 2010)

10 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com History of Banking Industry Major Asset Categories Since TARP (2 nd Qtr 2008 thru 3 rd Qtr 2010)

11 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com History of Change in Banking Industry Major Asset Categories Since TARP (2 nd Qtr 2008 thru 3 rd Qtr 2010)

12 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com Quanta Analytics Objective/Subjective Overview of Banking Industry Asset Changes 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 our analysis; 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 The fact that Cash assets have nearly doubled to $1.0 Trillion since the crisis began is rather interesting considering the general complaint that banks are not issuing new loans and since most of the TARP funds are reported as having been paid back. QA views the decline in Loan Assets as being consistent with the bank losses as identified in Parts I and II of our analysis due to chargeoffs and current poor loan performance increasing loan loss allowances ($550 billion), plus what would be expected from the normal principal pay down of existing loans over a nine quarter period through amortization ($200 billion). So QA 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 as an example of the Banks general flight to safety since the crisis began, increasing their commitment for new loans through the purchase of Government guaranteed securities rather than through their own internal banking and lending processes. QA views the decrease in the Other assets as a generally good trend that is likely tied to new regulatory restrictions and increased regulatory oversight.

13 Changing View of Banking Industry Loan Assets (Real Estate, Commercial, Individual, Farm, and Other) Since TARP

14 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com History of Banking Industry Loan Assets Since TARP (2 nd Qtr 2008 thru 3 rd Qtr 2010)

15 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com History of Banking Industry Loan Assets Since TARP (2 nd Qtr 2008 thru 3 rd Qtr 2010)

16 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com History of Change in Banking Industry Loan Assets Since TARP (2 nd Qtr 2008 thru 3 rd Qtr 2010)

17 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com Quanta Analytics Objective/Subjective Overview of Banking Industry Loan Asset Changes Clearly the biggest drop off in total loan assets are due to the clean-up and normal amortization of Real Estate loans (-$ 0.6 Trillion) and Non-Real Estate Commercial loans (-$ 0.3 Trillion), which is somewhat consistent with what QA observed in Parts I and II of its analysis, which showed these areas to be where the worst loan performance took place. In fact, without the somewhat surprising increase in Individual loans of approximately $ 0.3 Trillion over the period since the crisis, the total drop off in all loan assets would be $ 0.9 Trillion rather than just $ 0.6 Trillion. QA will show more clearly where the Individual loan increase came in subsequent charts. The relative drop off in non-Real Estate Commercial lending is a little more than what QA would otherwise expect from loan writeoffs and losses, so QA assumes some of the drop off simply reflects the general decline in the economy but also a result of a more conservative, risk adverse view towards business investment in general. Regardless, based upon the general decline in the total loan asset category, QA is left with no other conclusion than this: the banks have retrenched and are spending most of their effort in cleanup without issuing new loans within their internal operations while sitting on Cash.

18 Changing View of Banking Industry Real Estate Loan Assets (a subset of the Total Loan category) (Single Family, Commercial, Construction, Multifamily, Farmland, and Other) Since TARP

19 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com History of Banking Industry Real Estate Loan Assets Since TARP (2 nd Qtr 2008 thru 3 rd Qtr 2010)

20 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com History of Banking Industry Real Estate Loan Assets Since TARP (2 nd Qtr 2008 thru 3 rd Qtr 2010)

21 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com History of Change in Banking Industry Real Estate Loan Assets Since TARP (2 nd Qtr 2008 thru 3 rd Qtr 2010)

22 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com Quanta Analytics Objective/Subjective Overview of Banking Industry Real Estate Loan Asset Changes Clearly the biggest drop in the Real Estate area are due to the clean-up of Single Family loans and Construction and Land Improvement loans, which is consistent with what QA observed in Parts I and II of its analysis, which showed those areas to be where the greatest amount of losses (see Part 1) took place and which continue to show the worst on-going loan performance characteristics (Part II). One somewhat small, but positive sign in the Real Estate loan area is that Commercial Real Estate Lending (distinguishing this from general Commercial lending discussed earlier) has at least grown slightly rather than decline, which is different than what we observed in the overall non-Real Estate Commercial Loan lending area. Considering the current backlog inventory of Real Estate on the market and the general decline in housing prices throughout the nation it would not surprise QA if the amount of Banking Industry Real Estate Loan Assets remain somewhat stagnant in the near future.

23 Changing View of Banking Industry Individual Loan Assets (a subset of the Total Loan category) (Credit Card and Other Individual) Since TARP

24 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com History of Banking Industry Individual Loan Assets Since TARP (2 nd Qtr 2008 thru 3 rd Qtr 2010)

25 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com History of Banking Industry Individual Loan Assets Since TARP (2 nd Qtr 2008 thru 3 rd Qtr 2010)

26 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com History of Change in Banking Industry Individual Loan Assets Since TARP (2 nd Qtr 2008 thru 3 rd Qtr 2010)

27 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com Quanta Analytics Objective/Subjective Overview of Banking Industry Individual Loan Asset Changes Clearly the $ 0.3 Trillion step jump increase in credit card lending during the first quarter of 2010 is an anomaly that is hard to explain other than possibly as an after effect of individuals spending over the holiday period at the end of 2009 on credit. What makes this step jump even more interesting, if not disconcerting, is the fact that overall credit card lending had been fairly stable for a long period of time (years) prior to this step jump. In other words, it may reflect as much as anything else, the general tight straight that many households have been experiencing since the financial crisis. In relative terms, bank credit card lending increased 69% in that one quarter (1 st quarter of 2010)the quarter after the Christmas holiday of 2009. QA believes it will be interesting to see if we see another such effect after this years holiday season.

28 Changing View of Banking Industry Security Assets (U.S. Government, State and Local, Domestic, Foreign, Other) Since TARP

29 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com History of Banking Industry Security Assets Since TARP (2 nd Qtr 2008 thru 3 rd Qtr 2010)

30 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com History of Changes in Banking Industry Security Assets Since TARP (2 nd Qtr 2008 thru 3 rd Qtr 2010)

31 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com History of Change in Banking Industry Security Assets Since TARP (2 nd Qtr 2008 thru 3 rd Qtr 2010)

32 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com Quanta Analytics Objective/Subjective Overview of Banking Industry Security Asset Changes QA views the increase in U.S. Government Securities as a sign of the Banking Industrys general flight to safety. In lieu of originating loans internally through their own operations while they clean-up their own mortgage loan portfolios, the Banking Industry seems to support new loan issues by purchasing securities guaranteed by the U.S. Government. QA would also like to point out that the Banking Industry is not significantly committed to securities issued by states and other political subdivisions. In fact, the level of bank securities in this subdivision represent less than 1.4% of Total Banking Assets and less than 6.7% of all Banking Security Assets. We mention this because some experts are claiming that states and municipalities are going to be the next shoe to drop that will put the banks and our economy in another tailspin. QA also finds it interesting that the Banking Industry has increased its purchase of Foreign Dept Securities since the financial crisis. This increase in Foreign Debt Securities represents a growth of 144%, even though these assets still only represent less than 2% of Total Banking Assets

33 Changing View of Banking Industry U.S. Government Security Assets (a subset of the Security Asset category) (Treasuries, Non-Mortgage, Mortgage Pass Throughs, CMOs, Other) Since TARP

34 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com History of Banking Industry U.S. Government Securities Since TARP (2 nd Qtr 2008 thru 3 rd Qtr 2010)

35 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com History of Changes in Banking Industry U.S. Government Securities Since TARP (2 nd Qtr 2008 thru 3 rd Qtr 2010)

36 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com History of Change in Banking Industry U.S. Government Securities Since TARP (2 nd Qtr 2008 thru 3 rd Qtr 2010)

37 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com Quanta Analytics Objective/Subjective Overview of Banking Industry U.S. Government Security Asset Changes Although known, but still remaining a fairly well-kept secret, the Government programs of the FHA, VA, and Ginnie Mae did not play the same mortgage-loan game of risk that their more privately-operated sister- GSE agencies (Fannie Mae and Freddie Mac) and many of the private banks did. As a result, after the crisis hit and the GSEs and the banks started to come under intense scrutiny and curtail their loan programs, much of the loan activity that was taking place in the form of mortgage refinancing was picked up by the primary Government programs of the FHA and Ginnie Mae. QA believes it is predominantly these securities that the Banking Industry purchased in the form of either mortgage-backed pass through securities or Collateralized Mortgage Obligations (CMOs). Unlike many financial firms, QA views these as worthy investments, especially those backed with the FULL FAITH AND CREDIT stamp of the U.S. Government on them. The same holds true for U.S. Treasuries.

38 Changing View of Banking Industry Other Assets (Fed Funds, Trading Accts, Bank Premises, REO, Goodwill, All Other) Since TARP

39 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com History of Other Banking Industry Assets (i.e., Non Cash, Non Security, and Non Loan Assets) Since TARP (2 nd Qtr 2008 thru 3 rd Qtr 2010)

40 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com History of Changes in Banking Industry Other Assets (i.e., Fed Funds, Trading Accts, Premises, REO, Goodwill, All Other) Since TARP (2 nd Qtr 2008 thru 3 rd Qtr 2010)

41 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com History of Change in Banking Industry Other Assets Since TARP (2 nd Qtr 2008 thru 3 rd Qtr 2010)

42 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com Quanta Analytics Objective/Subjective Overview of Banking Industry Other Asset Changes QA views the decreases in the Banking Industrys Other asset category positively and hopes that this trend continues. For example, issues have been raised recently regarding the mishandling or misuse of repurchase agreements (part of the Fed Fund account) by Lehman Brothers, significantly covering up the true risk-burden of their endeavors. And now that the banks are coming under more scrutiny, we would expect the banks to be more cautious in their use of these type of assets to cover their risk position. QA also finds the decline in the Goodwill/Intangible asset category especially positively. QA feels that Goodwill more than any other asset (including the mortgage-backed assets that the mark to market people like to deride) is the most questionable asset on the Banking Industry Books. Since the beginning of the financial crisis, Goodwill has been reduced by about 25% and now represents less than 2.25% of all total Banking Assets.

43 For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com Quanta Analtics Final Comments Regarding the Asset Changes Taking Place in the Banking Industry Some people may question the value of even looking at the book accounting of bank assets because they feel that the books do not represent true or real value. QA does not carry that same view. QA feels that its review of the Banking Industry books, based upon the summary compilation of standardized financial reports that have been regularly submitted by more than 7,700 banking institutions over a period of years, is consistent with good financial analysis. Neither is QA concerned about mark-to-market issues relating to assets that have survived the test of time through one of the most financially confusing periods in the last sixty years. In its review of Banking Industry assets, Quanta Analytics sees no reason to change its rather upbeat opinion regarding the future of the Banking Industry and the U.S. Economy. QA views the asset changes that are taking place within the Banking Industry as being consistent with what QA feels is the necessary cleanup of the Banking Industrys previous mistakes and consistent with a more conservative, financially responsible mode of operation. QA also feels the banks are in somewhat 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. In fact, QA feels the banks, like U.S. business as a whole, seem to be waiting for either the next shoe to drop or the first legitimate sign of recovery. QA feels that no other shoe is going to drop and that there is no reason to wait or any time better than the present to start investing again in American business, supplying valued products and services to the rest of the world. Onward and upward as we charge ahead.

44 More to Come Later


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