Bank C&I NPLs Are Rapidly Increasing

Nonperforming Loans (NPLs) for U.S. Banks' Commercial & Industrial (C&I) loan portfolio is rapidly deteriorating climbing $9.32 Billion over 2015 Q4 figures.

Commercial & Industrial NPLs

While worsening C&I NPLs are concerning, it is the acceleration in the deterioration that should be alarming. The industry NPL% has leapt to 1.24% which is well above last quarter's 0.78%.

U.S. Banks Commercial & Industrial NPL %

The jump from 0.78% in 2015 Q4 to 1.24% in 2016 Q1 mimics the 1.17% to 1.69% seen in 2008 Q3 to Q4.

What's even more amazing is that the 1.24% would really be 1.28% if C&I lending had stayed flat. The jump to 1.24% was actually lower than it would have been due to the additional $71.168 Billion in additional C&I lending over last quarter.

Yes, at a time when C&I NPLs are increasing U.S. Banks added another $71.168 Billion of net additional C&I lending in the quarter. The $71.168 Billion increase (3.86% quarterly growth) was the second highest in history (2007 Q3 had $89.98 Billion).

As a reminder, we had considerable C&I loan growth from 2003 Q1 to 2008 Q3 as well. In 2003 Q1 C&I stood at $952.13 Billion. Just less than 6 years later it was $1.51 Trillion - growing $556.95 Billion (58.50%). Yes, very similar to the most recent growth.

Since 2010 Q2 C&I lending has grown from $1.16 Trillion to $1.91 Trillion - $748.78 Billion of growth in 6 years.

Banks Commercial & Industrial NPL %

Note how the growth was slower in the 2010 time frame and then began to accelerate in 2011. If we look at just the past 5 years the growth was $711.38 Billion (59.19%). To put this in perspective the other 12 large bank portfolios have collectively grown just $499.55 Billion.

5 Year Loan Growth in Billions (2011 Q1 to 2016 Q1):

Since 2011 Q1 C&I lending has increased $711.38 Billion for a 59% growth rate (light green text). Not only has C&I outpaced the other 12 portfolios in aggregate it has done so by more than $211 Billion.

Other high flyers have been Multifamily at 66%, Auto at 49% and Farmland at 36%.

 


I would caution that we're beyond the "it's Energy related" part of the commentary. C&I delinquencies are rising in most geographies and at nearly all big banks.

The following table lists the Top 15 C&I lenders top to bottom. At the top is Bank of America with $239.58 Billion in C&I (at an average Yield of 2.97%) and Bank of Montreal is #15 with $24.88 Billion in C&I.

C&I NPL % Heat Map Top 15 C&I Lenders

Wells Fargo has seen it's C&I NPL % climb from 0.55% in 2015 Q2 to 1.52% in 2016 Q1 - NPL $ climbed $1.46 Billion in the quarter.

Take a gander at Capital One jumping from 2.24% to 3.98%. Even SunTrust which had been performing exceptionally well has seen rates go from 0.20% 3 quarters ago to 1.09% - a fivefold jump in the rate in 6 months.

The two standouts in the group are Toronto-Dominion and Bank of Montreal. Both banks have seen NPL % rates decline over the past year.

C&I NPLs are getting worse and are likely to climb higher in the next few quarters. We can't add near $750 Billion in new lending in 6 years and not expect higher subsequent NPLs.

 


 

Commercial & Industrial NPLs:  Wells Fargo

 

Commercial & Industrial NPLs:  Citigroup

 

Commercial & Industrial NPLs:  SunTrust

 

Commercial & Industrial NPLs:  Capital One

 

Commercial & Industrial NPLs:  Comerica

 

Commercial & Industrial NPLs:  BOKF

 


 

Now, many people will say "hey, the banks are plenty well reserved for this. Well, not really. Let's take a quick look at BOKF's Coverage Ratio which compares their Loan Loss Reserves (ALLL) against their NPLs:

BOKF Coverage Ratio:

Just a few quarter's ago BOKF had $2.39 of reserves for every $1 of NPLs. A very fast increase of $144.78 Million in NPLs in two quarters took the ratio down to $1.01. While a $1.01 is not bad I think it's a good bet the ratio will fall even further in the next few quarters.

To paraphrase Mike Tyson - "everyone has a Loan Loss Reserve plan until they get hit in the face with rapidly increasing NPLs." Banks are well reserved until they aren't.

The glory days of declining Bank NPLs are behind us. The good news is that we're not seeing other Loan Portfolios begin to have NPL stress. That said, it would be shocking if we don't start to see some spillover in other portfolios.

For the first time in 5 years Commercial RE NPLs increased over the prior quarter.

Commercial RE NPLs:

The $162.23 million QonQ increase is not definitive proof that CRE is going to fall apart, however, it does indicate that we might have hit a bottom in NPLs for this cycle. To think C&I NPL stress will not lead to other issues would be an optimistic yet probably naive assumption. 

 


Data Source: all data is from BankRegData which collects Call Reports from the FDIC and makes it simple to analyze bank trends.