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.
to read the full report.
Kroll Bond Rating
Christopher Whalen, 646-731-2366
us on Twitter!