Top 50 Regional Banks Aren't Healthy nor Lending but Hoarding Cash, RateFinancials Study Warns

Banks Still Need a Minimum of $30B to $40B to Cover Impaired Loans and Expected Losses; their Impairment is Hurting New Job Creation and the Recovery

Jan 26, 2010, 09:15 ET from RateFinancials Inc.

NEW YORK, Jan. 26 /PRNewswire/ -- The top 50 regional US banks aren't healthy and despite a 12% increase in capital, still aren't lending to businesses which need credit. These banks have hoarded cash, and grown their short- term investments by over 1,360% but still find their capital is inadequate due to expected loan losses, inadequate reserves and loan impairment due to asset overstatement, according to a comprehensive study by RateFinancials Inc., a New York- based independent forensic research firm for institutional clients.

Regional bank lending is crucial for small and medium-sized companies who employ more than half of all US workers. Small businesses accounts for 49% of all US private-sector employment; these firms rely on banks for 90% of their financing and owe the banks over $1 trillion. The purpose of the RateFinancials study is to analyze the causes for the lending decline and to assess the health of the largest regional banks and their ability to lend.

Using FDIC information and employing propriety methodology, RateFinancials has analyzed and ranked the 50 regional banks by such detailed financial metrics as: profitability, asset quality, growth, capital adequacy, stress testing and governance whose results should give investors pause for concern.

"While the banks' capital ratios met regulatory standards, their 'stated' capital does not reflect the expected real loan losses from their large exposure to toxic commercial real estate and commercial business loans with the result that many banks are very sick and not capable of further lending," said Victor Germack, President of RateFinancials.

The US Banking Industry has endured a persistent secular decline in profitability since 2003 that may have forced banks into speculative lending practices. Profitability measured by loan interest rate spreads has declined steadily, from 2003 through 2008, for the FDIC Peer Group 1 of banks, from 4.06% down to 3.59%, and net income as a percentage of assets was only -0.5% for the past year, ending 9/30/90. "I feel there has been a long-term permanent impairment of the commercial business model and the implication for bank valuations and investors is very troubling," said Victor Germack.

Many banks have gamed the regulators by including items of questionable economic value and low quality in their Tier 1 Capital calculation, such as deferred tax assets and intangible assets, and under-reserving for their bad loans. Banks have compounded their capital problems by carrying loans substantially above fair value or what the loans are really worth today. Additionally, the FASB dictated accounting rule changes in 2010 will force many banks to bring substantial off-balance sheet assets back onto their balance sheet – forcing more realistic valuations, but cutting into capital.

Among some of the highlights of RateFinancials' study:

  • There Has Been a Material Overstatement of Banks' Assets – 32 banks, in our study, overstated the carrying value of their loan portfolios compared to the fair value of their balance sheet loans, as of 9/30/09, by a collective $36.0B or an average of  4.5% of Risk Weighted Assets;

  • In Stress Testing the Banks, Under the Severe Scenario, 24 of the 50 Banks Analyzed Would Need to Raise $8.3B of Additional Capital in Order to Remain 'Well-Capitalized';

  • Current Bank Balance Sheets Are Understated  & Will Require Additional Capital - New FASB rules will force banks to start moving these assets onto their balance sheets in 2010. Off-balance sheet assets was a sizable 25.5% of total assets and 80.3% of Tier 1 Capital. This will most probably cause banks to increase loan loss allowances, impacting earnings and requiring additional capital;

  • Over Reliance On 'Hot' Or Volatile Brokered Money Is Also Causing Bank Funding Instability – The bottom 5 banks, in our study, that relied most on brokered deposits reported such deposits represented an average of 22.9% of their deposits;

  • Officer and Shareholder Loans Are Too High and Indicate Poor Corporate Governance – Several Banks Have As Much As 5% to 8% of their Total Loans to Insiders;

  • The Best Bank Ranked According to our Findings Are: Silicon Valley Bank (SIVB), Bank of Hawaii (BOH), Citizens Business Bank (CVBF), Prosperity Bank (PRSP), and Signature Bank (SBNY); The Worst Banks Are: Wilmington Trust Bank (WL), Huntington National Bank (HBAN), Zions First Bank (ZION), Privatebank (PVTB), and M&I Marshall & Ilsley Bank (MI).

About RateFinancials

RateFinancials Inc. is a New York-based, independent risk research firm that rates the reporting of public companies based on their SEC filings. The firm's ratings focus on the quality of earnings, transparency and completeness of financial reporting, and corporate governance. RateFinancials does not make earnings estimates, provide any investment recommendations or speak with management. The firm was founded in 2002 by experienced investment bankers and equity research analysts, many of whom are CFAs. Visit:

SOURCE RateFinancials Inc.