Thursday, October 8, 2009

Commercial Loan Delinquencies Increased 200% since 2007

As the banking industry prepares to release third quarter financials, I am taking a look at mid-2009 delinquencies by loan type and by bank asset size. The industry closely follows consumer delinquencies and much is being written about mortgage, auto, and student loan defaults. As shown in Slide 1, commercial & industrial (C&I) and commercial real estate (CRE) loans enjoyed rock-bottom delinquency rates in 2005 and 2006, encouraging lenders to increase commercial loans outstanding at double-digit rates. (Double click on image to enlarge.)

Commercial lending historically lags consumer lending in good times and bad, and these are bad times. In the 2nd quarter of 2009, almost 8% of US CRE loans were past due more than 30 days. This delinquency rate exceeds consumer credit cards and is approaching the delinquency rate for residential mortgages. Fewer than 4% of C&I loans are delinquent, but these loans have the highest percentage change since 2007—a 215% increase in past due loans.
Banks of all sizes are struggling with delinquencies and non-performing loans. Confirming the wide-spread belief that community banks made better lending decisions than the mega-banks, 2.7% of loans are non-performing at the smallest banks, compared to 4.6% at the largest banks. It’s interesting to note that prior to the credit crunch, banks across asset tiers had similar non-performing rates.

Unfortunately, C&I loans at smaller banks are not performing as well as other loan types. One could conclude from this data that as smaller banks ramped up commercial lending, they did not have the same underwriting expertise as larger banks, contributing to poor credit quality. Larger banks also benefit from stringent monitoring of commercial credits, allowing them to proactively address deterioration in the portfolio.

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