Friday, August 21, 2020

Amid the many ways the world is going to pieces this year, one small but steady stream of anxiety is this: perhaps all those over-extended commercial real estate businesses will default on their loans and spark a banking crisis.

Calcbench wondered how one might quantify this particular unease, so we decided to hit the data. What are big banks reporting about delinquent commercial loans?

As usual, all the good data is buried in the footnotes. Most large banks include a disclosure section called “Loans” or “Outstanding Loans & Leases” or something similar. (This is not to be confused with “Allowance for Credit Losses,” which appears nearby but doesn’t contain the same information.)

In that Loans section, the bank will usually include a table that breaks out consumer, commercial, and credit card banking; with columns that denote total loans, current loans, and loans delinquent by 30, 60, or 90-plus days. Figure 1, below, is an example from Capital One ($COF) in second-quarter 2020. We colored the commercial banking line blue.

So if you do the math in that commercial line, Capital One had $77.49 billion commercial loans as of June 30, and $76.98 billion of that amount was current — which means a delinquency rate of 0.66 percent.

OK, now the next questions. Has that amount increased over, say, the last year or so? And is it wildly out of step with other banks?

To find those answers, Calcbench reviewed the delinquency data for six other banks, looking back over the last five quarters:

  • Bank of America
  • Capital One
  • Citigroup
  • JP Morgan
  • Key Bank
  • PNC
  • Wells Fargo

In each case, we looked at commercial loans only, and kept the math simple: total loans minus current loans, and the difference must therefore be the delinquent loans.

The results are Table 1, below.

Two points jump out to us right away.

First, no bank seems to have a huge problem with commercial loan delinquency in absolute terms. Even the worst, Citigroup ($C) still has 98.1 percent of commercial loans currently paid up. Its delinquent loans totaled $7.5 billion, measured against assets of $2.23 trillion.

The relative increase in delinquent commercial loans, however, is another matter. Citigroup’s commercial loan delinquency rate more than doubled in the last four quarters — although, the rate for Q2 2020 wasn’t that much above Q2 2019. So is the relative increase alarming? You tell us. Wells Fargo’s ($WFC) rate also nearly doubled over the last year. Hence we shaded both firms in red (Wells in a darker shade because its increase seems more dramatic).

Our analysis is simple, and we have no illusions that much more loan data is necessary to get a true picture of any greater risk to the financial system. But clearly commercial loan performance is changing. If that’s an issue you monitor in your financial analysis, Calcbench has all that data in our Interactive Disclosures page — just find the banks you want to analyze, and start digging.

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