By Manus Clancy,
senior managing director, Trepp, LLC
Common knowledge suggests that in the past two years, U.S. banks have come a long way toward growing their capital bases and improving their financial metrics.
Recently, Trepp decided to take a look at just how far the banks had come. We looked at a set of approximately 7,000 banks that file call reports; these statistics do not include bank holding companies.
As of first quarter 2011, 95.6% of U.S. banks were Well Capitalized, as the term is defined according to regulatory capital definitions. Another 1.9% of banks wereAdequately Capitalized, meaning the remaining 2.6% of the banks were either Under Capitalized, Severely Under Capitalized, or Critically Under Capitalized.
As of first quarter 2013, the numbers had improved. This is consistent with empirical evidence from the FDIC that fewer and fewer banks were on their “Problem List” each quarter, and the sharply lower rate of bank failures over the past year.
The capitalization statistics for Q1 2013 were as follows: 97.3% of the banks were Well Capitalized, another 1.3% were Adequately Capitalized, and less than 1.5% of the banks were either Under Capitalized, Severely Under Capitalized, or Critically Under Capitalized.
Most of this improvement is a consequence of weak banks being seized over the last two years. Other factors have also played important roles, such as capital raising by the banks, a recovery of asset prices, and retention of earnings.
Certain states have shown significant improvement since 2011. For example, that year, 76.7% of Georgia banks were Well Capitalized and another 6.5% of banks were Adequately Capitalized (for a total of 83.3%). Today, 91.2% of Georgia banks are either Well Capitalized or Adequately Capitalized–-an improvement of almost eight points. (Although we should point out that Georgia led the nation in seized banks over that time span.)
The story was similar in Florida. Just over 89% of Florida banks were Well Capitalized or Adequately Capitalized two years ago. Now, 94.3% of Florida banks fall into these two categories.
Not all states saw improvements, however. Both Arkansas and Ohio had near perfect scores two years ago. In each case, 100% of the banks were either Well Capitalized or Adequately Capitalized. Today, each has a handful of banks that do not make that grade, pushing their numbers into the upper 90s.
We should add a few other thoughts. First, these are non-stressed results–-they are snapshots in time as of the first quarter of both years.
When one stresses the banks’ income statements and balance sheets over the next two years per Trepp’s T-CAST stress testing tool, about 12% of the banks would need to boost capital in order to pass the stress test under a Severely Adverse scenario.
In addition, as we noted above, the condition of the bank is self-reported. We do our own calculations of capital ratios using non-performing loans and other metrics.
The percentage of banks not meeting the Well Capitalized or Adequately Capitalized threshold with these additional adjustments would be higher, according to our model, than the 1.5% that are coming through the call report data.