January 23 2008: 10:45 AM EST
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Banks are down, but not yet out

Multibillion-dollar writedowns have become scarily common, but that doesn't mean that a major bank will go under.

By Roddy Boyd, writer

NEW YORK (Fortune) -- With bank after bank posting multibillion-dollar writedowns and other impairments, are we going to see in the near future the failure of one or more major banks?

Maybe, but not very likely.

Of course, there's plenty of bad news: Banks are facing ugly times ahead, according to nearly every consumer and corporate credit metric available. Independent research shop CreditSights argued recently that regional banks in particular face enhanced risks, as the percentage of construction loans that are at least 90 days past due are spiking. Cherry Hill, N.J.-based Commerce Bancorp's (CBH) past due figure amounted to 3.88 percent of its construction loans in the third quarter, up from .70 percent in the second. Eight other (primarily Midwestern) banks fell in close behind, with percentages of construction loans 90 days past due that have at least doubled since the middle of last year.

That's why - aside from U.S. Bancorp (USB, Fortune 500), which is actually increasing its dividend - most banks are aggressively trying to preserve capital, cutting or reducing previously announced stock buybacks and dividend payouts.

Other lending businesses - which were supposed to help spread banks' risk - look troubled, too. For example, Bank of America chief financial officer Joe Price told analysts Tuesday that its credit card holders in four states - California, Nevada, Arizona, Florida, amounting to a quarter of BoA's credit card book - posted 30-day payment delinquencies at a rate five times faster than the rest of its portfolio. It seems likely that this pattern will haunt other credit card issuers as well.

Now the (semi) good news: For all the eye-popping charge-off news in the headlines, bank failures have become exceedingly rare, with only one substantial failure last year in the U.S: Internet start-up NetBank, which was shut down by the Federal Deposit Insurance Corporation over a combination of mortgage problems and capital shortfalls.

Another factor: being small might be a virtue in this era. The devastation wrought from the securitized product market's excesses - the sub-prime and collateralized debt obligation contagions - are almost entirely a product of the money center banks. So Dallas-based Comerica (CMA, Fortune 500), while heavily leveraged to the stalled Midwestern corporate and real estate lending markets, was not big enough to join the league of institutional traders and underwriters of sub-prime mortgage assets of all stripes, including CDOs. Given Citigroup's (C, Fortune 500) nearly $20 billion in writedowns in this area, Comerica's shareholders might be thankful that the bank's managers were forced to stick to their proverbial knitting.

One portfolio manager and 25-year veteran of bank analysis at a multibillion dollar hedge fund told Fortune that the issue of bank bankruptcy is miscast. "The largest banks aren't going to be allowed to collapse like an auto parts maker would," the money manager said. "They would probably be forced into some sort of merger, given the globe's inter-connected markets now."

Of course, that doesn't mean that the market won't see some significant stresses among previously high-flying banks. Consider Washington Mutual (WM, Fortune 500), which is mentioned almost hourly on Wall Street trading desks as the next obvious takeover candidate. Wamu's financials are scary - and getting scarier. In the fourth quarter, it showed a 77 percent increase in net chargeoffs and a spike in non-performing assets of more than 34 percent.

But it is in the realm of cash inflows in the form of deposits and borrowings that Wamu's woes become most apparent. In its most recent 10-Q, the bank revealed that its interest-bearing deposit base shrank to $27.2 billion from $32.7 billion. Total checking deposits also declined by $4.6 billion to just under $51 billion.

More importantly, however, the bank was forced to increase its borrowing from the Federal Home Loan banking system to $52.5 billion, a $31 billion increase from the pervious quarter. Thus, the bank was unable to obtain the necessary amounts of liquidity from the standard secondary market channels.

Can WaMu find a savior among other ailing banks? The company didn't return call seeking comment. But at least in the near term, Wamu's fate may tell us a great deal about where the entire banking sector is headed this year.  To top of page

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