U.S. Banks’ Asset Quality Improves With Less Net Charge-offs

U.S. Banks’ Asset Quality Improves With Less Net Charge-offs

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.

Broad-based improvement

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:

Net Charge-offs since 1Q91

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:

Net Charge-offs and yoy change

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%.

Delinquencies since 1991

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:

Loan Mix of Large and Mid-cap banks

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