Kroll Bond Rating Agency Bank Credit Outlook Q2 2016: Loan Losses Increase as Credit Cycle Matures

NEW YORK–(BUSINESS WIRE)–Kroll Bond Rating Agency (KBRA) has published a new research report
entitled “Bank Credit Outlook Q1 2016: Loan Losses Increase as Credit
Cycle Matures.” The report makes the following key points:

  • The Q1 2016 results for the US banking industry confirm the view by
    KBRA that the credit cycle is maturing and the banking industry is
    entering a period of significantly higher credit costs. FDIC Chairman
    Martin Gruenberg noted in the agency’s June 1st press
    conference that net income declined in the first quarter, noncurrent
    oil and gas loans rose sharply, trading income was down, and net
    interest margins remained low by historical standards. Even as
    non-current loans continued to fall loans in Q1 2016, net charge-offs
    tripled to almost 0.5% of total loans.
  • KBRA again notes that the era of virtuous performance of bank credit
    exposures almost perfectly coincides with the period of credit spread
    compression engineered by the Federal Open Market Committee (FOMC),
    begging the question as to whether we now face a sustained period of
    rising bank credit costs. At the end of 2015, provisions for loan
    losses exceeded charge-offs for the first time in six years. KBRA
    expects to see continued increases in charge-offs and bank loan loss
    provisions as 2016 unfolds, albeit mostly tied to energy exposures.
  • While some sectors such as commercial and industrial (C&I) loans
    (particularly energy, real estate and autos) may see increased
    incidence of charge-offs and non-current loans, overall KBRA expects
    the loan performance at U.S. banks to remain solid. For example,
    charge-offs and delinquency in bank auto loan portfolios actually fell
    in Q1 2016. It may be inevitable for bank credit costs to rise in the
    wake of the end of QE, but we do not expect that these increased
    credit costs will translate into lower credit ratings for banks in our
    coverage universe regardless of size. That said, the credit
    performance of sectors such as construction & development (C&D),
    multifamily and 1-4 family mortgage loans are quite literally too good
    to be sustained for an extended period, even with the benevolent
    credit environment engineered by the FOMC.

Click here
to read the full report.


Kroll Bond Rating
Christopher Whalen, 646-731-2366
Senior Managing
Scott, 646-731-2438
Managing Director
Stewart, 301-969-3186
Associate Director
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