By Jonathan Stempel - Analysis
NEW YORK (Reuters) - More U.S. banks may fail after the collapse of mortgage lender IndyMac Bancorp Inc, straining a financial system seeking stability after years of lending excesses.
More than 300 banks could fail in the next three years, said RBC Capital Markets analyst Gerard Cassidy, who had in February estimated no more than 150.
Banks face pressure as credit losses once concentrated in subprime mortgages spread to other home loans and debt once-thought safe. This has also led to investor worries about the stability of mortgage finance companies Fannie Mae and Freddie Mac; IndyMac is not related to either.
While analysts decline to speculate about which banks might fail, several smaller lenders and even larger ones appear to have elevated levels of soured loans relative to their sizes.
“You have to look at companies with the greatest exposure to the highest-risk assets, which include construction loans and exotic mortgages,” Cassidy said. “The final nail in the coffin for any depository institution would be a funding crisis where it is unable to gather deposits at reasonable cost, or wholesale funding markets are cut off.”
The Federal Deposit Insurance Corp (FDIC) seized IndyMac on Friday after a bank run in which panicked customers withdrew more than $1.3 billion of deposits in 11 business days.
This followed comments on June 26 by U.S. Sen. Charles Schumer questioning the Pasadena, California-based thrift’s survival. Some withdrawals also followed IndyMac’s July 7 decision to fire half its work force and halt most mortgage lending.
On Sunday, the head of the FDIC moved to quell any concerns depositors might have following the seizure of IndyMac.
”All bank depositors should understand that their insured deposits are safe,“ Chairman Sheila Bair said. ”The chance that your own bank will be taken over by the FDIC is extremely remote. And if that does happen, you will continue to have virtually uninterrupted access to your insured deposits.
“No bank depositor has ever lost a penny of insured deposits,” she added. “The overwhelming majority of banks in this country are safe and sound.”
IndyMac once specialized in Alt-A mortgages, which did not require borrowers to document income or assets. It was founded in 1985 by Angelo Mozilo and David Loeb, who also founded Countrywide Financial Corp, once the largest mortgage lender.
Bank of America Corp bought Countrywide on July 1.
As of March 31, the FDIC had put 90 banking institutions with $26.3 billion of assets on its “problem list.” This excluded IndyMac, which alone had about $32 billion of assets, and close to $19 billion of deposits.
Well over 2,000 banking companies failed in the 1980s and early 1990s. Cassidy said the government may need to set up a liquidator similar to Resolution Trust Corp, created for the earlier savings and loan crisis.
The largest U.S. bank failure is the May 1984 collapse of Chicago’s Continental Illinois National Bank & Trust Co. IndyMac was roughly the same size as American Savings & Loan Association of Stockton, California, a September 1988 failure.
Cassidy called the probability of failure “very high” if a bank’s nonperforming assets exceed the sum of tangible equity plus reserves for loan losses.
In a report on July 13, Richard Bove, a bank analyst at Ladenburg Thalmann & Co, said a “danger zone” is where nonperforming assets, including loans at least 90 days past due, exceeded 40 percent of common equity plus reserves.
“The system is not anywhere near the danger that existed in the late 1980s and early 1990s despite all of the whining by public officials,” Bove wrote. “Perhaps, the second quarter numbers will prove them right.”
Citing FDIC data as of March 31, Bove said that IndyMac had been at the greatest risk among more than 100 of the largest U.S. lenders, with a 146.2 percent ratio.
BankUnited Financial Corp of Coral Gables, Florida, was among lenders high on Bove’s list.
“We’re surprised to be near the top of that list,” Bert Lopez, BankUnited’s chief financial officer, said in an interview. “Our underwriting standards have been very conservative, we have insured a substantial portion of our loan portfolio, and our losses remain low on an overall basis.”
He declined further comment, citing a pending $400 million stock offering. BankUnited shares closed Friday at 77 cents. Other banks high on the list did not immediately return requests for comment.
The FDIC has said it will reopen IndyMac on Monday as IndyMac Federal Bank, and then try to sell the company as a whole or in pieces. Regulators expect the takeover to cost the FDIC $4 billion to $8 billion. The agency insurance fund has about $52.8 billion.
Among IndyMac’s assets are its deposits, 33 southern California branches, its Financial Freedom reverse mortgage unit, and a fast-deteriorating loan book.
Cassidy said thrift deposits tend to be less valuable than deposits at commercial banks because they yield more, and customers might be quick to leave once those rates disappear.
“For the right price, those branches and deposits are valuable, probably to someone with a footprint in southern California,” he said. “Would a Wells Fargo or a U.S. Bancorp, which are strong and healthy and would want to expand their franchise, look at it? I think so.”
Neither bank immediately returned requests for comment.
Additional reporting by Dan Wilchins; Editing by Martin Golan