Business, Consulting

Assessing the Pulse of the Commercial Banking Industry in 2024

In our annual analysis of the commercial banking industry’s health, we delved into the 2023 FDIC call reports for the fourth quarter, examining eight key ratios among banks. While no single ratio can provide a definitive picture of a bank’s well-being, collectively, they offer insights into the sector’s overall sentiment.

1. Tier 1 Leverage Ratio: 

Often touted as a marker of a bank’s capital adequacy, the Tier 1 Leverage Ratio is a critical metric. The industry standard of 8.1% serves as a baseline, with deviations warranting further investigation.

2. Texas Ratio: 

A backward-looking metric, the Texas Ratio sheds light on a bank’s loan portfolio performance. Staying below 4.93 is advisable, with higher figures signaling potential trouble spots.

3. CRE Loan Portfolio to T1 Capital: 

Assessing the capacity to weather a commercial real estate (CRE) downturn, this ratio examines whether banks possess sufficient capital to cover potential losses exceeding 200% of their CRE loans.

4. CRE Concentration: 

Regulatory scrutiny on banks with CRE concentrations exceeding 300% underscores the importance of monitoring this metric closely, as historically, such banks face a higher risk of failure.

5. Multi-Family NPL’s:  

Early signs of non-performing loans (NPLs) in the multi-family segment of loan portfolios could attract regulatory attention, particularly for banks with significant CRE exposures.

6. Reserve Ratio:

Taking a conservative approach, we incorporate 30-90 day past dues to gauge whether banks are adequately provisioning for loan modifications or potential charge-offs.

7. Securities Portfolio (Losses):  

Unrealized losses in the securities portfolio, primarily driven by mark-to-market adjustments for government-backed securities, are significant. A portfolio exceeding a negative 8.48% indicates heightened exposure, necessitating vigilance, especially in anticipation of market fluctuations.

8. Cash:  

With a conservative threshold set at 10% of total assets, the cash ratio provides a measure of liquidity cushion, essential for navigating unforeseen challenges.

To gauge each bank’s sentiment, we compared their ratios to industry benchmarks, categorizing them based on the number of positive ratios relative to their peers: If they are positive to all 8 ratios we classified them as feeling Bulletproof however if all eight ratios are not positive we classified them as feeling like they are dying.





 4: **Worried**

 3: **Anxious**

 2: **Depressed**

 1: **Scared**

 0: **Dying**

 A Look Ahead

Overall, 49% of banks exude confidence or better, with unrealized security losses mitigating some optimism. Meanwhile, 44% express unease or worry, highlighting the desire for enhanced deposits and improved CRE loan performance. A smaller cohort (7%) remains anxious or worse, grappling with signs of distress in their loan portfolios, and yearning for economic resurgence.

We anticipate an intriguing year ahead in 2024, as we share more detailed insights with our partners and stakeholders.

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