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.
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