C&I Growth, Eased Underwriting OCC ‘Concerns’
Accelerating loan growth accompanied by eased underwriting is a leading concern for U.S. banks according to the Office of the Comptroller of the Currency’s (OCC) semiannual Risk Perspective Report.
In terms of asset quality and loan growth, the OCC’s data paints a mixed perspective of the overall health of U.S. bank balance sheets. Positively, net chargeoffs are running below 25-year averages for all major loan type categories. However, delinquencies in the one-to-four family residential mortgages category remain stubbornly well above historical levels. Furthermore, commercial and industrial (C&I) lending is still growing at nearly 10% per year over the past four years. While this growth trajectory is less aggressive than in 2004-2008, it is a point of concern that Fitch shares with the report.
Loan growth in excess of economic growth, often a result of relaxed underwriting standards, could place greater pressures on banks over time. Consistent with the trends noted in the OCC report, several Fitch-rated community banks in particular have shown outsized growth in multifamily real estate lending, consumer lending and C&I lending in 2014.
While we generally view loan diversification (by both asset class and geography) as a positive, we have concerns regarding growth in C&I lending. Competition for C&I lending is highly intense and is at times being driven by nonbank lenders with weaker oversight than banks. The low interest rate environment, which is likely to move higher in 2015, is also a factor in Fitch’s view. We believe the rate environment has been supporting C&I’s better than historical average credit quality.
To view the full Risk Perspective Report, click here.