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What Non-Accrual Rates Tell Us
The
table below details the 90+ Days Past Due and Non-Accrual amounts for
the 1-4 Family First Liens for the 2nd Quarter Bank Regulatory data out
at www.wlmlab.com. The table lists the banks in descending order based upon the loan amount of their portfolio.
You can get the full list here.
How to Read
Bank of America has just over $8 billion in 90+ days past due compared to a little over
$14 billion in Non-Accrual. So for every $1.00 they have on Non-Accrual
they have $0.57 in potentially near-term charge offs. Naturally, not
every 90+ past due account will charge off and not every 90+ past due
account is on Non-Accrual.
That said, the ratio can provide
a nice measuring stick with how aggressively each institution is
managing future losses versus current income recognition.
Focused on Income
Wells Fargo (5.91), U.S. Bancorp (8.58) and PNC (5.42) all have a very low amount
on Non-Accrual relative to what they are looking at in late stage
delinquencies. This would indicate that they are much more focused on
generating interest income than they are in mitigating future charge
offs.
By putting a loan on Non-Accrual the bank is saying they think this loan will not pay back and therefore want to recognize
100% of the payment amount to go to principal pay down.
Focused on Charge Off Reduction
Hudson City (0.02) and SunTrust (0.33) are clearly being very aggressive in pro-actively working down balances. Bank of America, Citigroup and
BB&T are slightly leaning towards being conservative.
Confusion on Non-Accrual
There is a lot of misunderstanding surrounding what is or is not "supposed to be" on Non-Accrual. Comments I've received:
1)
Once a loan goes 90+ days past due it "automatically" goes on NA. Not
necessarily true. It may be bank policy for a specific bank to do this,
but there is no regulation requiring it. By the very fact that WFC has
a staggering $23 billion sitting 90+ days past due v. $3.879 billion in
Non-Accrual refutes the statement.
2) A loan in good standing and not past due would never be on NA. Not true. If the Risk Manager
of the portfolio thinks that the risk on the loan is great enough then
they may put it on NA regardless of whether or not it's past due.
If you waited until it's obvious they are going to charge off then what's the point? You wouldn't reduce the principal enough to
have an impact. It's about using Predictive Modeling to identify those with high 1 or 2 year charge off likelihood and then proactively putting them on NA.
3) Non-Accrual policy is strict and banks don't have the flexibility to "manage" the number. Oh, so not true. As a former Wells Fargo collection strategy manager for the Small Business Lending
group I very much managed the number. When times were good I was very
aggressive at identifying those with a higher likelihood of default and
aggressively putting them on NA.
When times were troublesome
and folks were watching NA rates I was instructed to "not be
so aggressive". Which, when you think about it is quite stupid. We were
worried that the street would see our high NA rates and think we had
issues. Instead of educating the analysts that no, relative to 90+ past
due our numbers were excellent - it's that we were being more than
cautious in our application on NA.
The Takeaway
Non-Accrual rates are an important measure to look at in detail when examining the
health of a loan portfolio. There is a lot of focus right now on NPA
ratios (non-performing assets) and many of these ratios include
Non-Accrual amounts. So, one way to lower an NPA ratio (since it's...
well, hard to actually collect on some of these) is to have low
percentage of your loans on NA.
»
The delinquencies quoted above seem to include delinquencies of already charged off loans.
thanks a lot for taking the time to explain
It's very instructive.
Very interesting. Tks. My problem is I don't trust these numbers. To me it looks like the only one owing up to their problem loans is Wells. The rest are sandbagging.
Looking at this and based on your experience give us your guess on the outcome of Well's book. They have 23b in 90 day, What percentage of this will go to Non A. Is 50% a good guess?
Of the Non A what is your guess at the realized loss when all is said and done. Is 25% of this number a good guess?
Example: 23b * 50% =13B. 13b+4=17b. 17b * .25 = $4b(anticipated loss)
Is this in the ball park of what to expect? Or is it a higher number?
Tks.
I really can't thank you enough for this article, as it helps me understand something which has been bothering me lately.
Namely, that BofA's Troubled Asset Ratio nearly doubled in the latest (June) report, while that of Citi, Wells Fargo and the other usual big culprits have had their TARs barely above the national median.
I was wondering why that was. This helps explain it. Many thanks again!
Why do all the definitions for non-accrual I've come across online say consumer loans and residential mortgages are generally exempt from NA guidelines?
And what impact do foreclosure moratoria have on these numbers?
http://www.wlmlab.com/bkLUR.asp?inst=HC1073757&pg=lla
I'm sorry but I was once an operations analyst that attempted to use SQL to generate reports for management in the days before MS Access but in close examination I often found that the data was corrupt due to the manner in which the tables were loaded during the daily mainframe backups. Deadline driven Management just wanted the report, not accuracy and I lost both my job and then my mind as a result. :- )
Better medication makes it possible as a hobby to look at the 2q 10-q for BOA, but I cannot find a single number to match to wlmlab data for that quarter.
As a single example I present Home Equity Loans listed as $155,058 in BOA and $124,770 in Lab. An adobe search of "124," returns 2 selections, a page number and the total assets for Merrill Lynch. I repeated this on several different numbers and nothing jives.
If you're going to make decisions based on data, trust me, conviction not accuracy matters, so why bother.
Trust what you believe and don't look to external justification as a crutch.
very nice piece, would like to see additional work from you bmoreland. thank you for taking the time to share the info.
rather educational, tnx !!!
and please post more.....
and Q, is it easier to spot a bank in trouble or a bank on a good standing? & Is there such a thing as a bank in a good standing in the long run (good standings should not be confused with too large to fail.)
tnx.
Just a test ... please ingore.
Thanks. very interesting
A few options:
1) they are focused on income so the quarterly numbers look great.
2) they are managing lower NA numbers so that their NPA ratios look better.
3) they are clueless on what they should be doing.
I can't honestly think of a good reason why they are doing this. "Good" being what I'd want to hear if I still held WFC.
Other options:
1. The collateral value exceeds the loan amount
2. There are good guarantees as to principal only
3. Wachovia related denial http://latimesblogs.latimes.com/money_co/2009/09/wells-fargo-commercial-...
4. http://ftalphaville.ft.com/blog/2009/09/18/72731/is-all-well-at-wells-fa...
5 http://online.wsj.com/article/SB125312018580716543.html
6. Could this be related to the purchase accounting markdown of Wachovias assets. If so they may be stated at Face value rather than their actual purchase price, which would be 50 cents on the dollar.
River
I'm looking at WFC's Q2 earnings release and see some pretty big disparities in the numbers. They show $6 billion in non-accruing first lien mortgages for 1-4 family residences and $1.497 billion 90 days + past due but still accruing. That latter number excludes insured/guaranteed GNMA and other similar loans).
But they had $10.7 billion of GNMA and other guaranteed loans that are 90 days plus past due and still accruing, which seems legitimate. WFC is the servicer on these mortgages and the government has the default risk.
I wonder if it's possible that the difference in the numbers the report you link to cite for WFC and B of A may be due to differences in how they account for GNMA and similar loans, i.e. they're in the 90+ day delinquent numbers for WFC but not for B of A. I don't see why WFC would report those numbers as if they were loans on their books when they're really only servicing them on somebody else's behalf.
I am surprised to find someone who actually trusts a financial statement by the bank related institution or has enough time / desire to go through it.
No pun intended.
No kidding! The bank financials have been fiction for the past 4 Q's. Don't really know who would be relying on them.
It didn't take 5 minutes to download WFC's Q2 report from their website and look at the relevant part of it.
I wouldn't trust WFC or any bank as far as I could throw the management and have no illusions about the effectiveness of bank regulators, but the massive disparity in 90 day + delinquent loans to non-accruals of WFC versus BAC made me think there has to be some kind of explanation.
I'm probably about as bearish as anybody here but assuming the worst in every situtation and making this place an echo chamber doesn't serve anybody's interests.
Go see Collapse and Capitalism.
Tell us which one you like moore...
http://www.metronews.ca/ArticlePrint/314122?language=en
I am not bearish, I am neutral until market becomes "normal" again. And by normal I mean both in touch with fundamentals and takes an obvious inflationary or deflationary trend.
Thanks very much for this excellent commentary. In your opinion is there a plausible explanation for why WFC's 90 day + delinquencies are so high relative to their non-accruals in comparison to B of A and some of the other banks you reference?
SOP 03-3 hides about $30bln of non-accruals acquired via the Wachovia transaction. If you add those back, the ratios look like they make a little more sense.
doesn't make it right or more transparent, but this was a GIANT motivation behind WFC stepping in over Citi to do the WB deal (haven't typed that ticker in so long...weird). That and the tax issues.
Here's some SOP 03-3 background:
http://www.fdic.gov/regulations/examinations/supervisory/insights/sisum0...