Banks can lend money for commercial and residential real estate and still make a profit, despite the beating the sector has taken for the past several years, industry analyst Dick Bove said.
Of the 1,150 or so banks with more than $100 million in assets, just 20 have been able to increase earnings each of the past five years, Bove, of Rochdale Securities, found in a study. (See list of banks below)
But at a time when risk-aversion seems to be the key for institutions content to collect on safe spreads, the key for good banking hasn't been fleeing to safety but rather through responsible lending practices, even in the taboo real estate field.
"These banks did not make bad loans," Bove wrote in a research note to clients. "The tougher question was why?...These banks on average had more real estate loans than all FDIC insured banks. They had more construction and development loans as a percent of the total than the industry. They were not more liquid nor did they have an excess in capital."
Indeed, the 20 profitable banks had about 38 percent more total real estate loans than the industry average.
So what has been the secret of banks that have continued to invest in real estate, maintaining profitability while their peers languished?
"[T]he only conclusion I would come to is that these bankers knew how to underwrite," Bove wrote. "They did not take excessive risk and they did not experiment with new loan structures."
A total of 149 banks have failed in 2010, and 317 have gone under since the financial crisis began in 2008, according to Keefe, Bruyette & Woods. Those institutions have consistently held a higher number of construction-and real estate-related loans than the industry as a whole.
Bove's list of the 20 banks that have been able to weather the storm and post consecutive years of growth: