The year ahead will look like smooth sailing compared to the banking sector’s near-collapse four years ago, but 2012 holds “more disappointments than pleasant surprises” for the industry, Trepp warns in a recent report. A particularly troublesome sticking point is losses from bad commercial real estate debt, which the New York City-based CMBS and commercial mortgage information provider expects to pile up over the next several months.

Delinquency rates among loans in each of the three major CRE classes—construction loans, commercial mortgages and multifamily mortgages—declined year over year in 2011, according to Trepp. However, Trepp’s report says the improvement in delinquencies has come at a cost. While the $122.5 billion in CRE loan charge-offs over the past four years represented slightly less than 20% of charge-offs for all banks over that time period, they account for more than half of charge-offs for community banks in the $100-million to $10-billion asset size range.

"We estimate that banks are about 60% to 70% of the way through their CRE loss recognition, with another $40 billion to $80 billion in losses to be written off going forward," according to Trepp. That being said, the report predicts that banks’ CRE loan performance overall will improve "incrementally" this year.

Trepp’s managing director, Matt Anderson, and VP Alex Micic, discussed the report’s findings in a webinar earlier this month. "The top headline is really that industry profits will come under pressure in ’12, with the result that profits will fall by 7%," Anderson said during the Jan. 12 webinar. That will put the current year slightly behind 2003 in terms of overall profitability.

He acknowledged that this prediction runs contrary to some other recent forecasts that have called for continued gains this year, "but it’s hard for us to see where these increases will come from." The dip will not be anything like the industry lived through in 2008 or 2009, but will represent a disappointment after two years of comparatively strong growth.

Anderson said three key factors account for this: reduced net interest margins created by the low interest rate environment and flat yield curve; the lack of any obvious replacement for the interest income on the revenue side; and the runoff of some benefits in the expense area, including the release of excess loss reserves—the difference between loss provisions and charge-offs— that were built up during the depths of the downturn. Trepp predicts that such releases will amount to only 5% to 10% of net income in 2012.

While the past couple of years have been marked by fewer bank failures than we saw during the worst of the capital markets trough, when major institutions such as Washington Mutual were taken into federal receivership, Trepp’s first-ever banking sector outlook report warns that the wave of closures is "not over yet." The firm estimates that approximately 230 financial institutions nationwide face a high risk of failure. In its monthly bank failure report for December 2011, Trepp noted that CRE loans comprised more than 80% of the nonperforming loans at the institutions the FDIC closed during the month.

How likely the 200-plus troubled banks are to plunge off the cliff depends on external as well as internal factors, of course. A plunge back into a deep recession domestically could ratchet up the number of failing banks to 430 between this year and next, double the toll of closures that have taken place since the September 2007 failure of NetBank in Georgia. A relatively moderate double-dip would still mean 300 nstitutions on the verge of going under by the end of 2013.

“Failures will occur at a slower pace than in 2011, but will be stretched further into the future," according to Trepp. "Stable economic conditions will be key to the outlook for a reduced pace of bank closures."