Mpls Fed: Regional Bank Recovery Is “Weak”

The Minneapolis Fed said that banking conditions in the Midwest remained relatively flat during the first quarter, but Senior Vice President Ron Feldman expects improvement during the rest of the year.

A quarterly report released Monday by the Federal Reserve Bank of Minneapolis indicates that Midwest banks are struggling through a slow recovery hindered by bad commercial real estate loans and weak loan growth overall.

Ron Feldman, senior vice president for the Minneapolis Fed, wrote in the report that the pace at which the region's banks are recovering continues to be “weak.”

The Minneapolis Fed oversees banks in the Ninth Federal Reserve District, which includes Minnesota, North Dakota, South Dakota, Montana, and portions of northern Wisconsin and Michigan.

Overall, the report said that banks are experiencing “weak loan growth.” Asset quality, which represents payment on loans, remained generally flat at low levels. When looking at nonperforming assets as a percent of capital and reserves, asset quality remains the worst for loans secured by the commercial real estate sector.

Feldman said that asset quality is most important factor behind banking conditions. “Asset quality has flattened out-basically at the bottom,” he said. The Twin Cities market had the weakest asset quality, while the Dakotas had the strongest.

Overall asset quality for the region's banks was consistently improving from about 2005 through 2009 but has since steadily declined.

Banks' return on average assets has dropped in recent years, due in large part to the significant number of banks reporting losses. But profitability was up for many banks in the first quarter.

According to Feldman, however, profits were driven by a decrease in provisions set aside for bad loans, rather than by core earnings. The main source of revenue for banks-interest margin-has actually gone down, suggesting that “the earnings increase is not likely to be sustained.”

Capital ratios-a key measure of banks' financial stability-remain mostly stable, “suggesting that the banking sector in the Ninth District appears financially sound overall.” Capital ratios indicate a bank's buffer against losses-meaning that as they get lower the chance of bank failures increases.

Despite a higher-than-average number of banks in the region having been assigned problem ratings by regulatory agencies, “a large majority of banks are still considered healthy,” the report states. The distribution of bank ratings is stabilizing as fewer banks are assigned the lowest possible ratings. And after a boost in bank failures in 2009 and 2010, no banks in the region were forced to close during the first quarter.

Feldman said that banking conditions during the second quarter will show whether the flat results of the first quarter are the beginning of a larger trend. But he predicts that there will be improvement in the region's banks throughout the rest of 2011.