US banks premature in reducing provisioning for bad loans
There are some interesting tidbits in Moody’s latest quarterly report on the US banking system, notably that US banks are premature in reducing provisioning for bad loans, and the charge-off trend now shows that the erosion of commercial real estate surpasses that of residential real estate.
Although asset quality deterioration began with residential real estate, US banks are now experiencing deterioration in all asset categories, Moody’s notes. The following chart serves as a “heat map” for asset quality issues at rated US banks. It displays concentrations (size of bubble), non-performing levels (y-axis) and charge-offs (x-axis) for the major asset classes.
As can be seen from the chart, residential mortgages represent the highest concentration in aggregate for rated US banks, at 37% of total assets. This is followed by commercial and industrial loans at 24% and then commercial mortgages (non-owner occupied income producing, commercial construction, and residential construction) at 14%.
Although all asset classes are showing deterioration, construction loans, especially residential construction, are significant negative outliers. These asset classes do not represent a significant amount of overall rated US banks’ assets, but individual banks with significant concentrations in these assets have been severely impacted
“US banks have recognized approximately 40% of the loan charge-offs that will be realized from 2008 to 2010. Moody’s anticipates these losses will continue to make many US banks unprofitable in 2010.”
“The third quarter saw a surge in bad loans. There was also an increase in early-stage delinquencies, reversing a positive trend that existed in the first half of 2009. Despite these adverse developments, US banks reduced their loan loss reserve build in the quarter. A common explanation for this was a slowdown in the increase in the banks’ net charge-offs in the quarter.”
To reduce provisioning appears to be premature, in light of the continued formation of non-performers and the asset quality trends that we expect.
Other highlights:
- The negative outlook for the US banks is driven by steady deterioration in asset quality, despite what appears to be the beginnings of a macroeconomic recovery.
- US rated banks have already charged off $88 billion of loans in 2008 and $112 billion more during the first nine months of 2009, leaving $336 billion to reach our full estimate of $536 billion of loan charge-offs in 2008, 2009, and 2010 (net of purchase accounting marks). This sum will be equal to 9.7% of loans outstanding at December 31, 2007.
- Aggregate non-performers rose to 5.2% of loans at September 30, 2009 and 3Q09’s total annualized net charge-offs came to 3.3% of loans.
- The US banks’ allowances for loan losses stood at $183 billion as of September 30, 2009, which is equal to 3.6% of loans.
- The charge-off trend now shows that the erosion of commercial real estate surpasses that of residential real estate.
- A clear positive in the quarter was the continued improvement in capital ratios through equity raises and balance sheet reduction.
For details see US Banking Industry Fundamental Credit Conditions — 3Q09. (Premium)
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