NEW YORK (Reuters) - U.S. banks may fail in far greater numbers following the collapse of the big mortgage lender IndyMac Bancorp Inc IMB.N, 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 FNM.N and Freddie Mac FRE.N; IndyMac is not related to either.
While analysts declined to say which banks will fail next, several smaller lenders and one large one, Washington Mutual Inc (WM.N), appear already 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 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.
IndyMac once specialized in Alt-A mortgages, which didn’t 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 (BAC.N) 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” in which a bank’s nonperforming assets exceed the sum of tangible equity plus reserves for loan losses.
Richard Bove, a Ladenburg Thalmann & Co analyst, in a July 13 report titled “Who Is Next?” said a “danger zone” is where nonperforming assets, including loans at least 90 days past due, exceeded 40 percent of common equity plus reserves.
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.
Among the other banks high on the list include Newport Beach, California’s Downey Financial Corp (DSL.N), with a 95.4 percent ratio; Fort Lauderdale, Florida’s BFC Financial Corp BFF.P, which invests in BankAtlantic Bancorp Inc (BBX.N); Coral Gables, Florida’s BankUnited Financial Corp BKUNA.O; Chicago’s Corus Bankshares Inc CORS.O; Los Angeles’ FirstFed Financial Corp FED.N; Troy, Michigan’s Flagstar Bancorp Inc (FBC.N), and Washington Mutual, at 40.6 percent.
The list also includes Puerto Rico’s Doral Financial Corp DRL.N, First BanCorp (FBP.N) and Santander BanCorp SBP.N.
“We’re surprised to be near the top of that list,” said Bert Lopez, BankUnited’s chief financial officer, 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 did not immediately return requests for comment.
Bove wrote: “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. Perhaps, the second quarter numbers will prove them right.”
The FDIC 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 (WFC.N) or a U.S. Bancorp (USB.N), 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.
Most IndyMac depositors will get their money back; the FDIC typically insures deposits up to $100,000, and up to $250,000 on some retirement accounts. The seizure came without warning.
“There are many regional banks that are under a great deal of pain,” said Daniel Alpert, an investment banker at Westwood Capital in New York. “Some of them will probably have guys with yellow tape showing up soon.”
Additional reporting by Dan Wilchins; Editing by Martin Golan