US banks hit by loan losses

by Richard Kilner

Story link: US banks hit by loan losses

US banks and thrifts have seen their earnings tumble by 24.7% in the third quarter (on a year-by-year comparison), falling to the lowest point since 2002.

Loan loss provisions are the highest they have been for 20 years, having reached $16.6bn this year compared to a mere $7.5bn this time in 2006.

Loan repayment difficulties continue unabated, with payments late by 90 days increasing for the sixth consecutive quarter.

Sheila Bair, FDIC chairman, described the quarter as ‘not particularly good’ for the banks and thrifts, blaming the current fragility in the real estate and financial markets for the situation and warning that the credit crunch will get worse before it gets better.

Bair went on to say that the effect the worsening housing market has on the wider economy will be of huge importance to the economic outlook.

Banks have already stated that they expect writedowns totalling $50bn in the third and fourth quarters.

Earnings have plunged to $28.7bn, a fall of 24.7% from this time last year and 21.8% from the second quarter.

The last time earnings were lower was in the fourth quarter of 2002, according to the FDIC, when it was $25.3bn, and is the first time since 2003 that earnings have dropped below $30bn.

On a brighter note, Bair indicated that the years of strong growth banks have enjoyed have given them high capital levels and robust risk management plans are in place.

In Bair’s opinion, the banks will be able to withstand the forthcoming economic turbulence, a view shared by the American Bankers Association.

Loans to homeowners are in dire need of revision and improvement, Bair said, to assist individuals with subprime or adjustable rate mortgages who could face losing their homes in the near future.