Industry-wide net charge-offs declined 9 bps in the first quarter of 2014, reaching their lowest level since 2007, notes Barclays in their recently published analysis of U.S. Large-Cap and Mid-Cap Banks.
Jason M. Goldberg and colleagues at Barclays in their Equity Research report dated May 21, 2014, analyzed the Fed’s quarterly report on bank net charge-offs (NCOs) and delinquencies for 1Q14.
The Barclays’ analysts point out that net charge-offs exhibited broad-based improvement. For instance, mortgage, CRE and other consumer and credit card all posted declines.
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As can be deduced from the following table, all major categories are currently below their historical levels. For instance, CRE posted 0.06% in 1Q as against 29-year average of 0.67% and C&I posted 0.20% as against 0.89%.
The following graph highlights the net charge-offs between 1Q91 and 1Q14:
The analysts point out that industry-wide net charge-offs dropped 9bps in 1Q14 to 0.52%, marking their lowest level since 2Q07. Goldberg et al. however point out that in 3Q12, net charge-offs were impacted by the OCC requiring the write-down of performing consumer loans restructured in bankruptcy. Moreover, they note looking at data prior to 2008, NCOs have historically declined a greater 25 bps in 1Q’s. They note that looking ahead, NCOs have typically averaged an 8bp increase in 2Q’s.
Net charge-offs at half their 29-year average
The following graph highlights net charge-offs and year-to-year changes for the past 29 years:
As can be deduced from the above graph, the analysts note at 0.52%, NCOs are roughly half their 29-year average of 1.02% and below their historical mean of 0.85%. However, the analysts note losses dipped as low as 0.34% in 1Q06. The analysts point out that while the industry may not return to that level, underwriting has been quite tight post-crisis. They also note while NCOs are now half their historical average, the industry’s reserve/loan ratio is less than 7% below.
Delinquencies below their long-term average
As can be deduced from the following graph, the Barclays’ analysts point out at 3.33%, delinquency rates are below their long-term average of 3.73%. C&I delinquencies are roughly 70% below their long-term average, while both credit card and CRE are 45% below. The analysts point out that at 7.82%, resi R/E delinquencies are almost double their 23-year average of 4.07%.
The analysts argue the judicial foreclosure systems in some states and modifications programs have kept this figure elevated.
The following table captures the loan mix of large and mid-cap banks: