NEW YORK/BANGALORE More than 1,000 U.S. banks, or one in eight lenders, may fail in the next three to five years as commercial loan losses rise, compounding problems from record mortgage delinquencies and soaring home equity loan defaults, RBC Capital Markets said on Monday.
That rate of failures would recall the height of the savings and loan collapse, when 1,386 lenders failed from 1988 to 1990, according to Federal Deposit Insurance Corp data.
RBC had previously said 200 to 300 lenders might fail over three years. It said most failures will occur at banks with less than $2 billion of assets.
"Credit losses in the U.S. banking industry will run into the hundreds of billions of dollars over this cycle," RBC analyst Gerard Cassidy said in an interview. "The FDIC will have to again raise deposit insurance rates it charges banks and tap into the Treasury Department, likely for billions of dollars. In the end, it is going to be the taxpayers who suffer, as well as common shareholders."
The FDIC has shut nine banks in 2009, on top of 25 in 2008. It ended September with 171 lenders on its "problem" list.
There are 8,309 FDIC-insured institutions with about $13.61 trillion of assets and $8.75 trillion of deposits, according to the FDIC website. The FDIC reserve to back deposits fell 23.5 percent in the third quarter to $34.6 billion as of September 30.
President Barack Obama's administration was on Monday nailing down details of a bank rescue plan expected to offer incentives to lure private investors into buying toxic assets.
U.S. Treasury Secretary Timothy Geithner is scheduled to announce the plan at 11 a.m. on Tuesday.
"Washington is planning fast and furiously with how to deal with the financial crisis," said Timothy Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York. "Losses that banks face are significant based on the value the market is putting on their assets. If there is some guarantee on toxic assets, losses could be minimized."
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RBC based its forecast on talks with industry experts and the amount of assets on which banks are not collecting interest as a percentage of tangible capital and loss reserves.
It created this "Texas ratio" during that state's banking crisis in the 1980s. RBC said lenders with a Texas ratio over 100 percent could be at risk of failure.
RBC said two of the 50 largest U.S. commercial banks have Texas ratios over 50 percent: Sterling Financial Corp STSA.O of Spokane, Washington, at 54 percent; and Colonial BancGroup Inc CNB.N of Montgomery, Alabama, at 53.4 percent.
Bank of America Corp (BAC.N), JPMorgan Chase & Co (JPM.N), Citigroup Inc (C.N) and Wells Fargo & Co (WFC.N), the largest U.S. banks, have respective Texas ratios of 21.6 percent, 6.5 percent, 18.4 percent and 15.5 percent, RBC said.
RBC urged investors to avoid bank stocks as the industry over the next year reduces risk and raises common equity. They said rising losses from commercial and industrial loans and commercial real estate loans may be partially offset by moderating residential loan losses in the latter part of 2009.
"We are nowhere near the end of this down leg in the current credit cycle," the analysts wrote. "The sooner the bank regulators can shut down the troubled banks, the faster the industry will get back on its feet."
(Reporting by Sweta Singh in Bangalore and Jonathan Stempel in New York; Additional reporting by Kevin Drawbaugh in Washington, D.C.; Editing by Pratish Narayanan and Andre Grenon)