Yesterday, it seemed like you couldn't throw a
rock in corporate America without hitting
someone that wanted TARP capital. Banks, credit
unions, finance companies, auto manufacturers,
municipalities and even Somalian Pirates have
put in for capital. It is a good thing too, as
commercial loan delinquencies continued to ratchet up in Oct.
Given the speed at which the market is deteriorating, it appears
certain most banks are going need an extra buffer. If you haven't
considered cutting dividends or have turned your back on TARP,
you might want to reconsider.
While pirates are stealing oil and cargo, the market has been
stealing precious capital. November looks like it will go down as
the month with the largest negative movement in CRE
probabilities of default since as far back as 1995. On average, it
appears community bank CRE delinquencies will jump 3.22% for
the month (a 38% annualized rate) from 2.12% to 2.20%. In
addition, 10 of the 21 sectors monitored in our Loan Pricing
Model look like they will hit a 6Y high when we produce final
numbers for Nov. Similar to Oct., loans to retail properties look
like they will experience the biggest problems and be the worst
performing sector of any category. Small business bankruptcies,
lease cancellations/defaults and very low lease-up rates (many
geographic areas are even negative) look like they will continue
to produce declining debt service coverage. Over the past month,
banks using our Loan Pricing Model have found that they had to
increase pricing levels on the average loan by 7bp, in order to
maintain the same projected return on capital.
Next to retail, hospitability and manufactured housing look like
they will also produce large (10%+) increases in delinquencies in
Nov. These sectors will likely be followed by all construction
areas (residential, commercial & multifamily), office and finally,
industrial. Each of these sectors will likely see delinquencies
increase by at least 5% for the month. Residential construction is
projected to see the highest delinquency rates at 5.32% (up from
5.05% in October) of any community bank lending sector.
On the positive side, self-storage lending is seeing resurgence,
as storage vacancies are projected to decrease for the month as
debt service coverage increases. Probabilities of default are
projected to drop from 2.5% to 46bp. Meanwhile, production
agriculture loans are expected to be the next best performing
sector (with a 1.03% probability of default, down -0.4%). After
that, multifamily is projected to be unchanged for Nov. (at
1.14%), leaving it the best performing sector in banking for 2008
to date (and probably for the year).
These large movements in delinquencies/probabilities of
default underscore why banks need a Loan Pricing Model to
better manage capital and communicate return goals throughout
the organization. No matter how experienced your loan officers
are, they most likely do not have an appreciation for how
deposits, volatility, delinquencies, recoveries and general loan
performance effects loan pricing in this market. Our Loan Pricing
Model starts at a mere $500 per month, carries no upfront
charges and can be cancelled at any time. While many banks are
trying to cut costs during this difficult period, one area bankers
will need to spend money is on are tools to help manage risk,
protect capital and produce a suitable return for shareholders.
Don't let the market continue to board your bank and catch you
unaware. If you would like more information or a trial of this
model, respond to this e-mail and we will get your bank the latest
defense against sub-performing loans and deliver lenders the
offensive tools they need to structure profitable assets.