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Fitch: Strong C&I Loan Performance May Reverse as Rates Rise

CHICAGO--(BUSINESS WIRE)--The asset quality of commercial and industrial (C&I) loans remains very strong and its performance is tracking better than historical averages. However, we expect that there will be some deterioration over the near-to-medium term as interest rates inch higher, particularly for midtier regional and community banks, as they have benefitted from strong C&I loan growth over the recent past, according to Fitch Ratings.

A rising interest rate scenario may contribute to weakening C&I credit quality in the future, with smaller banks potentially facing greater risks as a result of their thrust into this relatively newer loan space. The threat may not be imminent as Fitch only expects rates to rise modestly through the end of 2015.

We attribute some of C&I's strong credit performance to the low absolute level of interest rates, which may be enabling some more marginal borrowers to remain current.

Quarterly Fed survey data on C&I loans has been indicating steadily easing terms since the end of 2010, raising some caution in our prior C&I commentaries. Furthermore, high loan growth can indicate that banks are becoming price- or term-takers, which can indicate overly aggressive behavior or elevated competition. We see smaller regional and community banks as being more vulnerable to this concern.

Yet at this stage of the current credit cycle, net charge-offs of C&I loans across the FDIC-insured universe remain at just 23 bps at the end of first-quarter 2014, while both 90-day past due loans and those on nonaccrual status are also only 60 bps. Both of these measures are below the prior 30-year average of 0.98% and 2.25%, respectively.

C&I loan balances rose by $95 billion at FDIC insured banks between first-quarter 2013 and first-quarter 2014, a jump of over 6% that is notably higher than overall loan growth at roughly 3%. Growth rates have been highest among our rated universe of 18 midtier regional banks (banks generally with between $10 billion and $40 billion in assets). These banks reported 13% C&I loan growth during the same period.

With assets up to $10 billion, community banks have also been increasing C&I loan balances since the financial crisis. Fitch remains concerned about the smaller banks exposure to C&I lending, as this generally represents a relatively new asset class and some institutions may not have the requisite back-office infrastructure or experience to adequately identify, monitor and mitigate any ensuing credit risk.

Future C&I loan performance will likely depend on individual underwriting standards, as well as the health of the general economy, which tends to impact C&I loan quality greatly.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Contacts

Fitch Ratings
Julie Solar, +1 312-368-5472
Senior Director
Financial Institutions
70 W. Madison
Chicago, IL
or
Matthew Noll, CFA, +1 212-908-0652
Senior Director
Fitch Wire
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