Signs of an Upturn?
By The Nashville Post has run a piece noting that small area lenders had a good second quarter and concluding that that is a sign of an upturn in the economy. http://bit.ly/drF9uM (subscription required).
I agree with the conclusion that there is more lending being done by the area’s smaller banks. Some of these institutions are about the only place in town for capital these days. Without them, it would be really tough to find money. Whether this is a sign of an upturn, I have my doubts.
For some of these banks, you need to ask how much commercial debt they have with maturity dates in 2011 and beyond. I believe that banks are actively working to reduce their “noncurrent loan” numbers with the “extend and pretend” approach - where they enter into a forbearance agreement with borrowers. The borrowers then pay interest only or interest and a reduced principal payment. Once the borrower is in compliance with a forbearance agreement, I think banks then consider it a “current” loan.
But, in reality, the bank and borrower are just making the bet that the economy will be better in 2011 and 2012; that values will have rebounded enough for the borrower to refinance or sell at that point in the future. I am not criticizing this approach by banks and borrowers; just raising the point that looking at the total amount of “noncurrent” debt might not reflect how much “troubled” or “questionable” debt they might have on their books.
When the federal government did the stress tests on the big banks in late 2008, they had a cut-off date for maturity dates on the loans they considered. I think it was the end of 2010. So, the health as measured by the government at that time only took into account loans with maturity dates before the end of 2010. There is a big bubble of commercial loans with maturity dates beyond 2010 that weren’t considered by the government stress test, and I am not sure that bubble is measureable in the numbers in the Post’s analysis.
To see some data nationally on the bubble of commercial debt maturing after 2010, see the charts on pages 66-74 out of 190 (especially 72-74 out of 190) of the second link…
http://www.mglaw.net/2010/03/trouble-in-commercial-loans/
http://cop.senate.gov/documents/cop-021110-report.pdf
Obviously, there is no science in looking for signs of an upturn. Here, I think the increase in lending by smaller banks could just be a reflection that they are more nimble and able to find a way to lend money for smart projects while their larger brethren are still too shell-shocked to know a good loan when it is presented to them.
Related content
- Nashville Post’s 2Q 2010 Bank Performance Summary
- Trouble in Commercial Loans?
- Is $#*! Hitting The Fan?
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