January 31, 2012 - Despite last year's decline in US bank failures, at least 758 lending institutions are at risk of failure over the next two years, according to an analysis by Invictus Consulting Group, which conducts stress and sustainability tests on all FDIC-insured banks for regulators, banks and investors.
Based on all publicly available data on banks for the third quarter ended September 30, 2011, Invictus said that absent corrective action to raise capital or merge, the 758 banks are unlikely to remain viable. This is primarily due to the weak recovery, which could trigger a new wave of loan defaults. Approximately 200 of these banks are subsidiaries of publicly-traded bank holding companies.Invictus arrives at these conclusions after stress testing all FDIC-insured banks, using its proprietary ICAMTM (Invictus Capital Assessment Model). The model produces an Invictus Sustainability Rating for the banks it stresses, rating them from 1 (strongest) to 5 (most vulnerable). There are 758 banks rated 5. These banks have total assets of around $440 billion, or roughly $580 million on average. Over the past three years, 389 banks and thrifts failed, including 90 in 2011, according to FDIC figures.
"While any possibility of a bank failure is serious, what makes this situation even more dire is that the demise of any of these banks would adversely affect their local communities, especially smaller business people and those seeking to buy or improve their homes," said Kamal Mustafa, Chairman and CEO of Invictus. "Compounding the problem is the fact that larger national banks are starting to close down their smaller branches, so these communities will have even fewer lending resources."
Invictus's proprietary model digs into the vintage of assets by type of loan, so the model can judge when loans were placed on the books and predict the impact on earnings as loans roll off. "As old assets roll off, they are not being replaced at the same pace by new assets coming on, which puts bank earnings and capital construction under a great deal of pressure," explained Mr Mustafa.
The state of Florida has the largest number (72) and highest share (31%) of vulnerable banks among its institutions. The 72 have average assets of $539 million each and represent almost 25% of Florida's total bank assets of $158 billion. Other states with the largest number of most vulnerable banks include Illinois (69), Georgia (66), Minnesota (37) Missouri (33) and Tennessee (31). The only states with no banks rated 5 by Invictus are Alaska, Hawaii, New Hampshire and South Dakota.
Mr. Mustafa explained that the absence of a significant economic recovery will trigger these potential bank failures. "Borrowers will simply run out of time and resources," he said. "The banks' earnings will be insufficient to sustain capital and many banks will be unable to raise enough capital. We believe there needs to be significant capital-raising for those that can, or they must engage in mergers and acquisitions." Not all of the most vulnerable banks are small. New Jersey's 23 banks so designated – 20.4% of all the Garden State's banks – have an average asset size of $1.8 billion. Other states with large banks at risk include Louisiana (10, at $2 billion on average), New York (11, with $1.3 billion average each), Pennsylvania (21, at $1.2 billion average each), Delaware (4, with $1.2 billion average each), Michigan (18, at $1.1 billion each), and Massachusetts (14, with $1.1 billion average each).
