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Bank lending, credit risk and profit results for 2008

February 26, 2009 by Guest Contributor

By: Tom Hannagan

Part 1

It may be quite useful to compare your financial institution’s portfolio risk management process or your investment plans , to the results of peer group averages. Not all banks are the same — believe it or not. Here are the averages. You should look for differences in your target institution. About half of them beat certain performance numbers and the other half may be naturally worse.

As promised, I have again reviewed the Uniform Bank Performance Reports for the two largest peer groups through the end 2008. The Uniform Bank Performance Report (UBPR) is a compilation of the FDIC, based on the call reports submitted by insured banks. The FDIC reports peer averages for various bank size groupings and here are a few notable findings for the two largest groups that covers 494 reporting banks.

Peer group 1

  • Peer group 1 consisted of 189 institutions over $3 billion in average total assets for the year.
  • Net loans accounted for 67.31% of average total assets, which is up from 65.79 % in 2007.
  • Loans, as a percent of assets, have increased steadily since at least 2004. The loan-to-deposit ratio for the largest banks was also up to 96% from 91% in 2007 and 88% in both 2006 and 2005.

So, it appears these banks were lending more in 2008 as an allocation of their total asset base and relative to their deposit sources of funding.

In fact, net loans grew at a rate of 9.34% for this group, which is down from the average growth rate of 15.07% for the years 2005 through 2007.  The growth rate in loans is down, which is probably due to tightened credit standards. However, it is still growth. And, since total average assets also had growth of 11.58% in 2008, the absolute dollars of loan balances increased at the largest banks.

Peer group 2

  • Peer group 2 consisted of 305 reporting financial institutions between $1B and $3B in total assets.
  • The net loans accounted for 72.96% of average total assets, up from 71.75% in 2007.
  • Again, the loans as a percent of total assets have increased steadily since at least 2004. The loan-to-deposit ratio for these banks was up to 95% from 92% in 2007 and an average of 90% for 2006 and 2005.

So, these banks are also lending more in 2008 as a portion of their asset base and relative to their deposit source of funding.

Net loans grew at a rate of 10.48% for this group in 2008 which is down from 11.94% growth in 2007 and down from an average growth of 15.04% for 2006 and 2005. And, since total average assets also had growth of 10.02% in 2008, the absolute dollars of loan balances also increased at the intermediate size banks. Again here, the growth rate in loans is down, probably due to tightened credit standards, but it is still growth and it is at a slightly more aggressive rate than the largest bank group.

Combined, for these 494 largest financial institutions, loans were still growing through 2008 both as a percentage of asset allocation and in absolute dollars.

Tune in to my next blog to read more about the results shown relating to credit costs, loss allowance accounts and the impacts on earnings.