Credit Quality of Large Loan Commitments Improves

Credit Quality of Large Loan Commitments Improves

BankFor the second consecutive year, the credit quality improved for large loans that domestic and foreign banks as well as nonbanks were committed to make in 2011, according to the Shared National Credits (SNC) Review for 2011.

Total criticized loans—essentially those judged as questionable by regulators—declined more than 28 percent to $321 billion in 2011. Criticized assets represented 13 percent of the overall SNC portfolio, down from 18 percent in 2010.

Questionable loans remain
However, the percentage of criticized assets remained higher than it was before the financial crisis. A criticized loan is rated by regulators as "special mention, substandard, doubtful, or loss." Loans rated in the two weakest categories—doubtful or loss—declined 50 percent to $24 billion in 2011.

The Federal Reserve attributed the improvement in credit quality to such factors as better operating performance by borrowers, debt restructurings, bankruptcy resolutions, and ongoing access to bond and equity markets. Industries that led the improvement were real estate and construction, media and telecommunications, and finance and insurance.

Past lending decisions' effects linger
Despite this progress, poorly underwritten loans made in 2006 and 2007 continued to hurt the SNC portfolio. Roughly 60 percent of criticized assets originated in those two years.

Meanwhile, refinancing risk remained high as nearly $2 trillion, or 78 percent of the SNC portfolio, matures by the end of 2014. Of this maturing amount, $204 billion was criticized.

Although nonbanks, such as securitization pools, hedge funds, insurance companies, and pension funds, owned the smallest share of loan commitments, they owned the largest proportion, 58 percent, of classified credits (rated substandard, doubtful, or loss).

In other highlights of the review:

  • Total SNC commitments increased less than 1 percent from the 2010 review. Total SNC loans outstanding fell $93 billion to $1.1 trillion, a decline of 8 percent.
  • Classified assets declined 30 percent to $215 billion in 2011 and represented 9 percent of the portfolio, compared with 12 percent in 2010.
  • Credits rated special mention, which exhibited potential weakness and could result in further deterioration if uncorrected, declined 25 percent to $106 billion in 2011 and represented 4 percent of the portfolio, compared with 6 percent in 2010.
  • Nonaccruals declined to $101 billion from $151 billion. Adjusted for losses, nonaccrual loans declined to $92 billion from $137 billion, a 33 percent reduction.

August 31, 2011