The latest quarterly report on the United States banking system indicates a profitable and improving industry that seems to contradict the fearful selloff in the marketplace over the last few months.
The report was issued by the Federal Deposit Insurance Corporation (FDIC) and covers all commercial banks and savings institutions insured by that organization. The FDIC reports that the 7,513 institutions covered earned $28.8 billion in the second quarter of 2011, up 38% from the same quarter in 2010.
TUTORIAL: Safety and Income
This improvement in earnings was led by lower provisions for loan losses by many banks, which continued to work through the bad loans that piled up over the last few years.
The FDIC also reported that capital levels moved higher with the leverage capital, tier 1 risk-based capital, and total risk-based capital ratios reaching all time highs in the second quarter of 2011. (Find out how economic capital and regulatory capital affects risk management; check out How Do Banks Determine Risk?)
A look at the capital levels of the top five banks in the United States demonstrates this improvement in Tier One capital relative to the peak of the financial crisis and recession:
|Q1 - 2011||Q4 - 2008|
|Bank of America (NYSE:BAC)||8.75%||4.70%|
|JP Morgan (NYSE:JPM)||10.03%||6.53%|
|Wells Fargo (NYSE:WFC)||9.37%||3.30%|
|U.S. Bancorp (NYSE:USB)||8.18%||5.41%|
|Source: FIG Partners|
The FDIC assigns a rating to each institution under its jurisdiction, as a means of determining which require special attention. Banks given a 4 or 5 rating are those that have "financial, operational, or managerial weaknesses that threaten their continued financial viability" and are labeled as problem institutions.
The number of these problem institutions declined on a sequential basis, to 865 from 888 in the first quarter of 2011. This is the first decline since before the recession and financial crisis began. Some of this decline may be due to the 61 banks that either failed or merged during the second quarter of 2011, but at least the trend is moving in the right direction.
The market has been inundated with talk of a double-dip recession, which has caused many investors to abandon the financial sector as they seek to avoid another bloodbath in their portfolios.
The Financial Select Sector SPDR (NYSE:XLF) peaked at $17 per share in February 2011 and sold off down as low as $11.81 before recovering slightly. This exchange-traded fund is dominated by large banks but also contains some insurance companies.
The SPDR KBW Bank ETF (NYSE:KBE) had a similar and more pronounced selloff over the same time frame, as this exchange-traded fund is exclusively composed of banks.
The Bottom Line
The recent selloff in banks and other financials due to fears of another recession might create opportunities for some investors. The FDIC report, although backward looking, gives confirming evidence of a vastly improved banking system.
Stock AnalysisThese three stocks are resilient, fundamentally sound and also pay generous dividends.
ProfessionalsMutual funds are a good choice for emotional investors. Here are five popular funds to consider.
Investing NewsAre stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
Investing NewsHere are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
Investing NewsHere are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
Stock AnalysisIf you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
Mutual Funds & ETFsExplore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
Chart AdvisorInvestors are keeping an eye on the transportation industry. We'll take a look at the trend direction and how to trade it.
InvestingBeing vigilant about the amount you pay and what you get for is important, but adding ETFs into the investment mix fits well with a value-seeking nature.
InvestingFinancial literacy is the confluence of financial, credit and debt knowledge that is necessary to make the financial decisions that are integral to our everyday lives.
The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>