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Friday, April 24, 2009

Not All Banks Increased Loan Write-Offs in Q1

In the past two weeks, the majority of large and small banks have now reported earnings sharply higher than most analysts had expected.

The surprises had experts questioning how banks could have cooked the books to pump up earnings. Many pointed to 'mark to market' valuation rule changes. Others observed increases in allocations to cover bad debts.

But on Friday, one bank demonstrated an ability to overcome all objections to positive earnings. Not only did Wilmington Trust Corporation (WL) handily beat all earnings estimates, but it sharply reduced the amount of money set aside to cover bad loans, and in Q1 2009 wrote off many fewer loans as unpaid.

Not only that, the latest quarter's results were further boosted by a net gain of $7.6 million in Wilmington Trust's investment portfolio. Not counting that gain and write-downs, Wilmington Trust's first-quarter profit was $17.4 million, or 19 cents per common share.

Including the write downs and one-time gain the bank was able to pay up handsome preferred dividends in addition to posting profit. Wilmington Trust's stock surged 32% on Friday.

These strong results are just additional evidence that early season investor jitters about banks' ability to perform well in Q1 were unfounded.


  1. I read a month or so ago a Morgan Stanley real estate analyst report that the Govt. would need to deal with $3 trillion in bad real estate loans (residential and commercial). Has the concern now gone away or is it still unclear? Also, if the banks are doing so well, do we still need the Treasury plan to take the "toxic assets" off their balance sheets through public/private purchase program?

  2. @Anonymous,
    What has changed significantly in recent months is that banks are originating new loans - some at record paces. As the Well Fargo CEO put it this past week, "we will continue to focus on earnings. If we can continue to earn, the capital issues will take care of themselves."
    WRT to the Treasury plans the soon those troubled assets are off the bank books the better. The are risky assets, but that doesn't mean they'll never be worth anything. In fact they may be quite valuable 10 years from now.

    At this point however I doubt that the program is absolutely necessary for most banks. For instance Wells Fargo took advantage of the drop in interest rates to issue more than $100 billion of mortgages in q1 2009. Revenue almost doubled to $21 billion, including Wachovia’s contribution, and helped the company overcome $3.3 billion of charges from unpaid loans. The allowance for credit losses totaled $23 billion, about twice the level of loans that have stopped collecting interest.

    If those loan origination rates continue for Wells, that's a $400B in new loans for 2009 against the $23B reserved for potential losses in 2009 and 2010. Looks pretty promising to me.

    Gloomsters like to talk about the fear of bad commercial loans as "the next shoe to drop." The reality is that the total commercial real estate market is significantly smaller than the residential market. The US residential market is about $50T and the US commercial market only about $15T.

    Given what the banks have just reported in the past quarter and how many new (non-subprime) mortgages have been originated. There is no doubt the that residential housing market has now stabilized and in much better shape than a year ago.

  3. What do you make of Nouriel Roubini's prediction of 40% mortgage default rates coming up with the increase in unemployment and changes in the "teaser" rate loans? He seemed to be out in front early predicting the collapse of housing and the credit crisis. Or does he simply prove the old adage that even a broken clock is right twice a day?

  4. I am planning to write a piece on Roubini's predictions later today. Look for it later this evening or tomorrow morning. The short answer is as you suggest... and he makes his money on preaching gloom and securing speaking engagements no matter what the economic conditions are.

  5. The above contemplation is smart and doesn’t necessitate any further calculation. It is great thought from my side.
    Henry Pollick
    loan modification


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