Banking Industry Analysis/Outlook Posted by AVCU on 10:08 AM

Robert F. DeLucia, a Consulting Economist with MEMBERS Capital Advisors, Inc., the SEC Registered
Investment Advisor of CUNA Mutual Group, has 35 years of investment experience and has held senior level positions with several investment management organizations. Periodically, he offers his analysis of the economic environment in which U.S. credit unions operate. Below are current highlights:

• While still far from normal, the fundamentals of the U.S. banking system have improved steadily over
  the past several years. In the absence of recession, further progress is expected in 2012 and 2013.  
• A healthy and smooth-functioning banking system is a vital precondition for a steadily expanding economy. The extremely weak economic recovery of the past two years can be attributed in large part to a dysfunctional banking system.
• Evidence of improved health can be found in key ratios of bank profitability, asset quality, loan loss
  reserves, bank liquidity, and bank capital. The ratio of tangible common equity (TCE) climbed to 11.3%
  in Q2, the highest level since 1938. 
• Despite continued weakness in bank loans, all measures of profitability remain in an upward trend, mainly the result of steadily improving bank credit quality and cost reduction. However, major
  structural changes will prevent a return to profitability levels that prevailed prior to the Great
  Recession. 
• While the trend in recent quarters is encouraging, the banking industry remains hostage to cyclical
  trends in the broad economy. In particular, an economic downturn would trigger an increase in
  delinquencies and loan losses. At greatest risk are mortgage loans, which remain vulnerable to further
  house price declines.
• Intense deleveraging of the banking system over the past three years has been accompanied by a 
  prolonged period of declining bank loans. Rebuilding of bank balance sheets is a precondition for a healthy and sustained rebound in bank lending.
• U.S. banks do not face direct exposure to the European debt crisis because of minimal holdings
  of European sovereign debt and much improved capital positions. However, U.S. banks are vulnerable to the indirect impact of contagion stemming from growing financial stress within the
  European banking system. 
• Continued rehabilitation of the U.S. banking system should provide a solid foundation for healthy
  economic growth and a more stable financial system over the next several years, although the pace will be gradual. The small business and housing markets will be the primary beneficiaries.
• Read the rest of the analysis and outlook here.