Texas Ratio Anyone?
SAN FRANCISCO (MarketWatch) — Banks remain under pressure after bad loans increased during the second quarter, according to one measure of financial strength in the industry. Downey Financial may be among the lenders that are suffering most, while National City and UCB Holdings are in better positions, judging by a measure of these companies known as the Texas Ratio.
The number basically measures credit problems as a percentage of the capital a lender has available to deal with them. It’s calculated by dividing a bank’s non-performing loans, including those 90 days delinquent, by the company’s tangible equity capital plus money set aside for future loan losses.
The ratio was developed by RBC Capital analyst Gerard Cassidy and colleagues as an early-warning system for spotting future trouble at banks. During the Texas banking crisis in the late 1980s, Cassidy noticed that when problem assets grew to more than 100% of capital, most of the banks in that precarious position ended up failing. A similar pattern occurred in the New England banking sector during the recession of the early 1990s. Since the mortgage-fueled credit crunch erupted last year, Cassidy and his colleagues have applied the ratio to commercial banks and other lenders.
At the end of the first quarter, IndyMac had a Texas Ratio of 140%. In July, federal regulators shut down the thrift in one of the largest bank failures in U.S. history. Cassidy recently updated Texas Ratios for the 50 largest commercial banks in the U.S., incorporating results from the second quarter. None of these banks are in anywhere near as much trouble as IndyMac. However, increases in bad loans continued at a worrying pace, the analyst reports.
As of the end of the second quarter, First Horizon National of Memphis, Tenn., had a Texas Ratio of 33%, the highest of the 50 largest U.S. commercial banks, according to RBC Capital. That was up from 30.6% at the end of the first quarter and 10.6% on June 30, 2007. First Horizon raised $690 million selling new shares in the second quarter. The company also agreed to sell its mortgage business outside Tennessee. These steps helped strengthen its capital ratios. However, the bank also said second-quarter net charge-offs increased to $127.7 million from $99.1 million in the previous quarter. Non-performing asset were 3.88% of total loans, up from 2.78% in the first quarter.
Fifth Third makes it into the Top 10, with a Texas Ratio of 27.9% at the end of June. That’s up from 23.4% on March 31 and 8.5% a year ago, according to RBC. The North Carolina company lost almost $9 billion in the second quarter after huge write-downs and charges. It cut its dividend for a second time, saving $700 million of capital per quarter and is planning other steps to conserve capital including shrinking its balance sheet, cutting costs and selling units that aren’t central to its business.
February 23rd, 2010 at 3:55 pm
The main reason for the failure of the majority of banks is irresponsible lending to developers both residential and commercial. Almost all of these loans did not follow responsible underwriting standards. The majority of community banks did little if any residential lending. Most of them worked as brokers for the large residential lenders when a customer needed a home purchase loan. Where were the regulators?
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