Large US Banks See Credit Quality Decrease

loan quality drop

Large U.S. banks are seeing a deterioration in commercial lending portfolios for the first time in three years, according to a report by the Financial Times.

The news is making some investors worried about whether it’s the start of a trend, considering the relatively strong state of the economy.

Ten of the biggest commercial lenders saw non-performing loans rise 20 percent in Q1, or about $1.6 billion. The news showed a reversal from a steady improvement in the quality of credit, going back to 2016, when oil prices caused the crash of a large number of borrowers.

“What does it look like when the economy actually slows?” asked Brian Foran, a bank analyst at Autonomous Research. “It is a notable enough change that people have taken notice.”

The bad loan level is low compared to banks’ balance sheets: JPMorgan Chase’s $1.9 billion in commercial non-performing loans is part of its $442 billion portfolio. The trend is raising eyebrows in investors, however, because it’s happening during low interest rates and strong economic growth.

Also, there’s not one specific industry to seemingly blame, besides the energy crunch a couple of years ago.

“There hasn’t been a clear theme,” Foran said. “Some banks have mentioned lingering energy problems, and a couple of niche categories like fast casual restaurants and rural hospitals.”

Commercial lending has grown rapidly, and banks in the U.S. have $23 trillion in commercial loans, which is double the level from 2011 and bigger than overall bank lending growth.

Loans that are threatening to default rose 8 percent in Q1 at 20 banks. It’s not currently known how much the bankruptcy filing of PG&E, the California utility company facing potential penalties linked to the devastating wildfires in the state, has affected the industry. Banks like Bank of America, Wells Fargo and JPMorgan Chase were all listed as lenders on the utility’s $3 billion credit facility.


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