Monday, September 14, 2009

Loan Loss Reserves

It's been a while since I've slogged through the bank loan loan loss reserve schedule. The last time I wrote about it was on April 14, 2008 here. Here's what I said:

Now, have you heard one banking analyst talk about the above schedule? I think not. The last time I pulled this schedule out was to remind readers that when the analysts said about 16 mos ago that "loan losses are low" (1) we are at the peak of a cycle AND (2) that means that there is one place to go (like low unemployment rates). I'm tempted to say that with the crappy underwriting we are likely to see numbers that exceed the one from the recession in early 90's.

Here's what it looks like now. I noted in yellow the curve when I wrote about it.

The peak was about 2.75%. We are at 2.94% or a mere 7% higher. I'm going to posit that we'll see this number get MUCH higher. Why?

  • I believe that we'll have an L shaped bottomed recovery (I'm not talking about the market, which I believe has gotten ahead of itself).
  • Underwriting was so much more responsible then v. now
  • Asset values were not so extended then v. now
  • The weighting of loans in the pool given the massive reissuance is tilted toward the lesser quality, more poorly underwritten loans.
How high can it go? I really don't know. I boldly said on Toshi's blog (Tim Knight) that it could double. To be sure, I've no valid empiricism for that. But I think that I can safely say that a 7% increase with the fundamentals at hand will be eclipsed by a larger number.

1 comment:

katzo7 said...

So is this rally in trouble? When do we sell?