Credit quality declines at big US business lenders
Sudden rise in non-performing loans comes despite low rates and strong growth
The quality of big US banks’ commercial lending portfolios is deteriorating for the first time in nearly three years, leaving investors to wonder whether there is worse to come should the ebullient economy slow.
Non-performing loans at the 10 largest commercial lenders rose 20 per cent, or $1.6bn, in the first quarter, according to an analysis by the Financial Times. That reversed a steady improvement in credit quality dating back to 2016, when a wave of borrowers fell into default after oil prices crashed.
The level of sour loans remains historically low relative to banks’ balance sheets. JPMorgan Chase’s $1.9bn of commercial non-performing loans, for example, is part of a $442bn portfolio. But the sudden increase in problem credit is raising concerns, given low interest rates and strong economic growth.
“What does it look like when the economy actually slows?” asks Brian Foran, a bank analyst at Autonomous Research. “It is a notable enough change [in credit quality] that people have taken notice.”
Unlike the energy crunch a few years ago, there is not a single industry coming under pressure. “There hasn’t been a clear theme,” said Mr Foran. “Some banks have mentioned lingering energy problems, and a couple of nice categories like fast casual restaurants and rural hospitals.”
Commercial lending has grown rapidly since the crisis. US banks have $2.3tn in commercial loans, according to the Federal Reserve, almost double the level of 2011 and easily outpacing the growth in overall bank lending.
Loans categorised as “criticised” — a broad regulatory category that captures loans that are or are threatening to become impaired — rose 8 per cent in the first quarter at the 20 regional banks Mr Foran covers, the first quarterly increase he has seen in three years. The increase in criticised loans at the big banks was 5 per cent.
It is not certain how much the industry figures have been affected by the January bankruptcy filing of PG&E, the California utility facing liabilities associated with its role in the state’s wildfires. Among large banks, Bank of America, JPMorgan Chase and Wells Fargo were all listed as lenders on the utility’s $3bn credit facility, according to S&P global intelligence.
Speaking at an industry conference on Tuesday, the chief financial officer of M&T Bank, which has a $23bn commercial portfolio, said that while its delinquency rates remained at multiyear lows, the bank is seeing “management shortfalls” at some companies: “Taking on too much leverage to do a deal that they weren’t capable of pulling off, not managing expenses properly, in some cases not having the right controls in place and getting themselves in trouble.”
One reason corporate borrowers are feeling the strain now is the withdrawal of liquidity by the Federal Reserve. As the central bank turns from pushing money into the system by buying bonds to absorbing it by selling them, loans become harder to refinance or roll over. In April, according to Fed data, total commercial credit at banks did not grow from the month before for the first time since the end of 2017.
“Liquidity has been the driver of asset prices for the past decade and will be the cause of deflation of asset prices in the coming years,” said Charles Peabody of Portales Partners. “Corporations, particularly small and middle market businesses, have been living day-to-day based on their access to liquidity.”
Another contributor to the rapid recent growth of commercial debt, and a potential source of risk, is nonbank lending. Some banks provide financing to nonbank lenders from fintech companies or to the loan funds run by big private equity houses such as Blackstone. All of this is classified as commercial lending on banks’ balance sheets.
GreenSky, a fintech that provides consumer and business loans over the internet, said on Wednesday that one of its lenders, Regions Bank of Alabama, said it had decided not to renew its funding commitment at the end of this year. Its shares fell 11 per cent on the news.
A related worry involves smaller banks that have been aggressively buying syndicated loans originated and packaged by other banks or fund managers. One commercial banker said: “If they are buying from nonbank financial sponsors, there might be issues.”
Anton Schutz, a veteran bank investor at Mendon Capital, added: “What you are seeing for the first time since the crisis is the normalisation of credit. You are supposed to lose some money in lending. That’s why you get paid a spread.”