Great balls ‘a fire…..don’t look now, but another bomb may be hitting the financials in the near future, courtesy of the Fed, Comptroller of the Currency and the FDIC.
The Shared National Credit Program was established in 1977 by the Fed Board of Governors, the FDIC, and the Office of the Comptroller of the Currency to provide an efficient and consistent review and “classification” of any large syndicated loan. The program covers any loan or loan commitment of at least $20 million that is shared by three or more “supervised institutions” (that means the banks, you layman). The joint-agency review is conducted annually, usually in May and June, and is currently underway.
The purpose of the examination is to focus on the stability and soundness of the banking industry and to identify “classified” loan commitments. These are loans that are “classified” into three categories: substandard, doubtful and loss. Examples of these include loans with liberal repayment terms such as little to no amortization prior to maturity, e.g. “interest only”, reliance on refinancing as a primary source of repayment, and lack of meaningful financial loan covenants such as leverage and fixed charge coverage ratios.
Expect the volume of classified loans to increase significantly in 2008 from the 2007 numbers. Last years audit showed that the total Shared National Credit commitments (SNC) increased 21% to over $2.28 trillion from $1.87 trillion in the 2006 report. (This is the largest increase since 1998). Of those totals, nearly $72 billion represented the “classified” loans, up over $10 billion from 2006.
The 2007 review was conducted in Q2 last year, which didn’t include the deterioration and weakness in non-investment grade or leveraged credit facilities. Pile on top of this the disruption of the global credit markets and you have a potentially greater risk to all syndicated loans and SNCs.
Bottom line, there will be more write-downs for loan loss reserves in Q3 this year due to a potential record increase in classified loans. How much of an increase in classified loans? Figure in a double digit increase. Obviously, the banks will report egregiously lower earnings.
Some names that have above average exposure to classified loans include: [[KEY]], [[C]], [[BAC]], and [[WB]].
You want to buy more bank stocks, Mr. Kass? Go ahead. Flush your money down the toilet.
To read last years report about SNCs, here is a link to the Fed’s website. This year’s data will be reported in September.
http://www.federalreserve.gov/newsevents/press/bcreg/20070925a.htm
You may continue to short the banks at your leisure.
Update: If the Dow, the P’s and the Naz are all down today, I will take the offense off the field and summon the defense to gang tackle the weak bulls. In other words, a confirmed extended down trend will be in place. We’ll at least test the March lows.
Disclaimer: This information is not intended to be used as the primary basis of investment decisions. Because of individual investors requirements, it should not be construed as advice designed to meet the particular investment needs of any investor. Consult your financial advisor prior to taking any actions. The information and opinions contained here are those of the author and are not necessarily the same as those of iBankCoin, its principals or its affiliates.
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