NEW YORK--(EON: Enhanced Online News)--Kroll Bond Rating Agency (KBRA) has published a new financial institutions research report entitled “Credit Outlook Q4 2016: As Benign Environment Ends, Bank Portfolios Suggest Future Stress.” The report makes the following key points:
“Credit Outlook Q4 2016: As Benign Environment Ends, Bank Portfolios Suggest Future Stress.”
- As U.S. markets near the release of Q4 2016 earnings, KBRA notes again that credit conditions for financial institutions continue to be stable and reflect a benign environment overall. It is increasingly apparent, however, that the increase in asset prices engineered by the Federal Open Market Committee (FOMC) over the past five years is nearing a conclusion and that bank credit costs are slowly rising – albeit from very low levels.
- The big change since our last credit outlook is that the election of Donald Trump has seen a dramatic and somewhat disparate change in the direction of interest rates and Treasury spreads. Even as the yield on Treasury and agency benchmarks has risen, spreads for investment grade and high-yield securities have remained stable and even declined, suggesting that investors do not yet see the prospect of a Trump Administration as heralding a bear market in corporate debt.
- After rising for several quarters following the drop in oil prices, the rate of change in non-current C&I loans has slowed considerably. Net charge-offs of loans to C&I borrowers rose $946 million or about 83% in Q4 2016. At 1.43%, the non-current rate for C&I loans seems to have stabilized and the net-charge off rate as a proportion of total loans has actually declined slightly, suggesting that the energy related surge in bank credit losses that began in 2015 in the C&I portfolio may have peaked.
- Finally, trends in the real estate sector suggest that the best days in terms of credit performance are behind U.S. banks. Although currently the credit picture regarding bank-owned real estate loans remains quite benign, the image is in many ways too good to be true. The data released by the FDIC suggests that the FOMC’s efforts to manipulate asset prices may have created a potential credit problem in real estate for U.S. banks in the future. As we’ve noted in previous missives, when banks are reporting negative credit costs on trillions of dollars’ worth of real estate loans, we generally consider that to be a red flag regarding future credit performance of these portfolios.
To view the report, please click here.
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About Kroll Bond Rating Agency
KBRA is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO). In addition, KBRA is recognized by the National Association of Insurance Commissioners (NAIC) as a Credit Rating Provider (CRP).