Somber Fed assessment see stalled Q1 bank improvements

Lending activity across the Upper Midwest continues to shrink, according to a somber assessment of banking conditions released Monday by the Federal Reserve Bank of Minneapolis.

The report also found that the improvement in bank balance sheets seen since the first quarter of 2009 has stalled. It also said that recent profit gains are “unsustainable,” citing a slowdown in bad-loan write-offs banks had been taking.

“It looked like we had hit bottom at the end of last year,” Ron Feldman, senior vice president at the bank, told reporters at a press conference. ”We’re still at the bottom in terms of banking conditions, or we’re having a weak recovery. One quarter does not a trend make, but that’s where we are now.”

Delinquent real estate loans, which had been the primary cause of most banks problems through the depths of the recession, are “not getting worse anymore, but [they’re] not improving,” Feldman said.

Commercial and industrial loans, primarily to small businesses, “saw slight deterioration.”  Also, agricultural loans also showed some increase in non-current or delinquent loans, but Feldman said that was a typical seasonal phenomenon.

The 694 banks that make up the six-state Ninth District are primarily small institutions, making loans to individuals and small businesses. Ninety-eight percent of the banks have assets under $100 million, with more than half the banks located in Minnesota.

Twin Cities area banks stood out as having the weakest balance sheets, because of the real estate bubble and the high number of foreclosures, Feldman said. Across the district, delinquent loans averaged a little more than 20 percent of total capital and allowances for bad debt, while that number was 35 percent among metro area banks.

Bank Loans Still Shrinking: New loan growth, year over year (%)
Federal Reserve Bank of Minneapolis
Bank Loans Still Shrinking: New loan growth, year over year (%)

Feldman said that the shrinking lending activity poses a “headwind” to economic recovery, citing three factors reducing loan volume: Banks have voluntarily tightened their lending standards. In addition, about 250 banks across the region are still rated weak or worse by bank regulators and are making few, if any, loans until their balance sheets improve. Finally, Feldman said the weak pace of economic recovery has slowed the demand for loans from many businesses.

 “There is intense competition” for loans to qualified, high-quality borrowers, he added.

Feldman predicted that bank conditions should improve throughout 2011, “although the pace of recovery could be quite slow.”

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