Report: Banks Historically Weak But Improving

According to the Federal Reserve Bank of Minneapolis, banking conditions for the Ninth District are still historically weak, but asset quality, earnings, and liquidity improved in 2010 and will slowly continue to improve in 2011.

Banking conditions in the Ninth District still remain historically weak but are showing signs of improvement, according to a report released Thursday the Federal Reserve Bank of Minneapolis.

Banks in the Ninth District-which includes Minnesota, Montana, North and South Dakota, part of Wisconsin, and the Upper Peninsula of Michigan-are weak compared to 10 years ago, but 2010 brought improvement in asset quality, earnings, and liquidity.

Asset quality-which assesses nonperforming loans-is on the road to improvement, according to Ron Feldman, a senior vice president at the Federal Reserve Bank of Minneapolis. Asset quality is strongest when the percent of nonperforming loans is low.

Feldman said in summary video posted on the Federal Reserve Bank's Web site that asset quality remains at a high level compared to the last 10 years, but it has “dipped” in the last three or four quarters-suggesting an improvement.

Feldman said that the weak asset quality is driven by commercial real estate loans. Commercial real estate loans make up almost half of bank lending, and the asset quality in this sector is “very weak.”

However, Feldman said that many of the bad real estate loans that were made three or four years ago are slowly “rolling off” the books of banks, which will improve both asset quality and earnings.

In 2011, Feldman said he expects to see the same slow improvement shown in the latter half of 2010. He said that a “shock” to the real estate industry could hinder improvement, and a weak demand for loans could slow the improvement.

Minnesota had one of the lowest risk-based capital ratios in the district at 14.1 percent. A minimum total risk-based capital ratio of 10 percent is required to be considered “well-capitalized” by regulators.

“We're seeing improvement in conditions, but it could be a slow road ahead of us,” Feldman said.”

The Federal Reserve Bank of Minneapolis supervises 83 banks and 573 bank holding companies in the district. Overall, 67 percent of the banks in the district are in “satisfactory” condition. About 64 percent of the banks in Minnesota rated “satisfactory,” while nearly half-46 percent-of the banks in Montana rated “unsatisfactory.” Feldman noted that Montana was “relatively weak” compared to the rest of the district.