While banks have not had to expect write-downs and bad loans to the extent that they would in a normal recession this year, criticized commercial loans have steadily increased. A criticized loan is a risk of default but it may not be overdue and therefore may not show up as a write-off or even late payment. If they go up, that is another indicator of a deterioration in creditworthiness and can be an indication of what is to come.
In the third quarter, some of the big banks saw their criticized trade credits decline from the elevated levels seen in the second quarter, if not all. Let’s take a look.
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Criticized asset levels
It’s no secret that many commercial sectors struggled when people recalled their activities to prevent the coronavirus from spreading. Three of the largest banks in the country, JPMorgan Chase (NYSE: JPM), Bank of America (NYSE: BAC), and Citigroup (NYSE: C)have more than doubled their criticized business loans in the first six months of the year. Wells Fargo (NYSE: WFC) The commercial loans criticized also increased significantly, albeit less than twice as much.
JPMorgan Chase, which had broken down its criticized assets by industry, saw strong gains in the consumer and retail, oil and gas, automotive, and media and telecommunications sectors. Citigroup saw high levels of criticized credit in the transportation and industrial, retail, media and telecommunications, and energy, chemicals, metals and mining sectors.
| Bank |
Criticized commercial loans 9/30/20 (Billions) |
Critical commercial loans 6/30/20 (Billions) |
Criticized commercial loans 12/31/19 (Billions) |
|---|---|---|---|
| JPMorgan Chase | 37,4 $ | 39,4 $ | $ 15.1 |
| Bank of America | 35,7 $ | $ 26 | 11,5 $ |
| Citigroup | 74,3 $ | 72,6 $ | 30,4 $ |
| Wells Fargo | 37,3 $ | 38,2 $ | 20,5 $ |
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Source: applications for authorization.
JPMorgan Chase and Wells Fargo saw their criticized commercial loans decline in the third quarter and are moving in the right direction. Total wholesale credit at JPMorgan and total commercial credit at Wells Fargo were also down from the second quarter, but this continues to be a positive trend.
Wells Fargo saw a decrease in criticized loans in its commercial and industrial loan portfolio for the quarter, but grew $ 2.2 billion in commercial real estate for the quarter. The bank said 92% of that increase came from the hotel / motel, mall, and retail sectors.
Bank of America saw its criticized loans jump nearly $ 10 billion in the quarter. While failing to specify the industries with the increased criticized assets, Bank of America CEO Brian Moynihan said in the company’s third quarter earnings report that the increase was mainly due to the industries that are not yet fully open. There’s also a good chance that hotel loans are a significant part of the surge, as CFO Paul Donofrio says 60% of the bank’s hotel loans are classified as criticized loans. However, with a total of $ 35.7 billion in commercial credit criticized as of the end of the third quarter, Bank of America had less than any of the other three major banks, if only slightly. Hotel loans also make up less than 1% of the Bank of America’s total loan book.
What does that mean?
It’s a good sign that criticized commercial loans are stabilizing with some of the country’s largest banks. Remember, criticized loans are those that management has reason to believe are headed towards crime or default. So if they increase it could indicate problems in the future. Because of this, it has been difficult to feel good about credit quality, even though write-offs (debt that is unlikely to be collected) and bad loans have not occurred as is common in a recession.
While Federal Reserve and federal government actions are still likely to obscure the true credit picture in banks’ loan portfolios, the reduction in criticized loans at some of these big banks gives some confidence that management has at least a thorough review of their loan book and is feeling fine about its reserves, given the information it has.
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