WASHINGTON (MNI) – The following was issued Thursday by the Federal
Reserve, FDIC and the Office of Comptroller of the Currency:
Credit Quality of Large Loan Commitments
Improves for Second Consecutive Year
The credit quality of large loan commitments owned by U.S. banking
organizations, foreign banking organizations (FBOs), and nonbanks
improved in 2011 for the second consecutive year, according to the
Shared National Credits (SNC) Review for 2011. A loan commitment is the
obligation of a lender to make loans or issue letters of credit pursuant
to a formal loan agreement.
Total criticized loans declined more than 28 percent to $321
billion in 2011, although the percentage of criticized assets remained
high compared to pre-financial crisis levels. A criticized loan is rated
special mention, substandard, doubtful, or loss. Loans rated as doubtful
or lossthe two weakest categoriesfell 50 percent to $24 billion in
2011.
Reasons for improvement in credit quality included better operating
performance among borrowers, debt restructurings, bankruptcy
resolutions, and ongoing access to bond and equity markets. Industries
that led the improvement in credit quality were real estate and
construction, media and telecommunications, and finance and insurance.
Despite this progress, poorly underwritten loans originated in 2006
and 2007 continued to adversely affect the SNC portfolio. Approximately
60 percent of criticized assets were originated in these years.
Refinancing risk remained elevated 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 nonbank entities, such as securitization pools, hedge
funds, insurance companies, and pension funds, owned the smallest share
of loan commitments, they owned the largest share (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. Criticized
assets represented 13 percent of the SNC portfolio, compared with 18
percent in 2010. 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. The distribution of credits across entitiesU.S.
banking organizations, FBOs, and nonbanksremained relatively unchanged.
U.S. banking organizations owned 42 percent of total SNC loan
commitments, FBOs owned 38 percent, and nonbanks owned 20 percent. The
share owned by nonbanks declined for the first time since 2001. Nonbanks
continued to own a larger share of classified (58 percent) and
nonaccrual (60 percent) assets compared with their total share of the
SNC portfolio. Institutions insured by the Federal Deposit Insurance
Corporation owned only 17 percent of classified assets and 15 percent of
nonaccrual loans. The media and telecommunications industry group led
other industry groups in criticized volume with $70 billion. Finance and
insurance followed with $37 billion, then real estate and construction
with $35 billion.
Although these groups had the largest dollar volume of criticized
loans, the three groups with the highest percentage of criticized loans
were entertainment and recreation, media and telecommunications, and
commercial services. The 2011 review indicated that the number of
credits originated in 2010 rose dramatically compared to 2009 and 2008.
Although the overall quality of underwriting in 2010 was significantly
better than in 2007, some easing of standards was noted compared to the
relatively tighter standards in 2009 and the latter half of 2008.
Federal banking agencies expect banks and thrifts to underwrite
syndicated loans using prudential underwriting standards, regardless of
the intent to hold or sell the loans. Poorly underwritten syndicated
loan transactions are subject to regulatory criticism.
The SNC program was established in 1977 to provide an efficient and
consistent review and analysis of SNCs. A SNC is any loan or formal loan
commitment, and any asset such as real estate, stocks, notes, bonds, and
debentures taken as debts previously contracted, extended to borrowers
by a federally supervised institution, its subsidiaries, and affiliates
that aggregates to $20 million or more and is shared by three or more
unaffiliated supervised institutions. Many of these loan commitments are
also shared with FBOs and nonbanks, including securitization pools,
hedge funds, insurance companies, and pension funds.
In conducting the 2011 SNC Review, agencies reviewed $910 billion
of the $2.5 trillion credit commitments in the portfolio. The sample was
weighted toward non-investment grade and criticized credits. The results
of the review are based on analyses prepared in the second quarter of
2011 using credit-related data provided by federally supervised
institutions as of December 31, 2010, and March 31, 2011.
** Market News International Washington Bureau: 202-371-2121 **
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