Cool US Banks Charge-Offs ...

Credit strategists at BNP Paribas write today:

In a recent report Moody's have indicated that that rate of loan charge-offs by US banks [This report is for those US banks that are rated by Moody’s, which have more than $50bn in assets and hold approximately 85% of the total assets of the US banking system] has exceeded levels seen in the early years of the Great Depression. The rating agency estimates that, with the bank Q3 earning season coming to a close, rated US banks incurred $45 billion of loan charge-offs collectively in the quarter. Cumulatively, charges-offs in 2009 have now reached $116bn. The 2009 annualised charge-off rate of 3.4% exceeds the early years of the Great Depression and that number, if realised at the end of the year, would be on par with the peak reached in 1934 (chart 1).

Click on chart to enlarge, courtesy of BNP Paribas.

But do not worry, as my trading pals suggest, markets have "discounted" that. For example, Jan Bylov, the chief analyst at Nordea Markets, wrote in a note yesterday:

... investors (and humans in general) once having acknowledged the root cause of a shock then any aftershock are having a decreasing effect on markets (life).

So, a crash is not in cards, at least not due to banking?

Coming back to credit strategists at BNP Paribas, the perspectives are:

The consensus however remains optimistic. The major rating agencies have recently lowered their expectations for default rates for late 2010 due to lower financing costs, and a favourable basis of comparison. Consensus earnings estimates for banks remains optimistic given our view that with low growth, NPAs will remain high leading to continued provisioning at banks and losses at investors. A quick, sharp, sustained recovery in growth (without inflation) is what policy makers need. Much will depend on the continued availability of cheap and plentiful liquidity and an early removal could lead to resurgence in growth of NPAs, while a delay risks the creation of another asset bubble. Although we do not expect another rise in “elephant” bankruptcies, we remain concerned on the impact of a low-no growth scenario could have on bank’s NPAs, potentially leading to another round of losses and provisioning.

Just add the latest unemployment picture into US banks equation ... hey, but discounted?