Home > Stock Analysis

Banks Hit By Increasing C&I Loan Defaults

Posted: Nov 11, 2008 14:02 PM by Eric Fox

Tickers in this Article: UB, BAC, KEY, SOV, FITB

Recent earnings conference calls indicate that banks have another headache coming up as delinquency rates are moving higher in the commercial and industrial loan (C&I) category.

Get Free Stock Analysis By Email

More Pain On The Way
The government defines this category as a loan for commercial or industrial purposes not secured by real estate. C&I loans are a large part of bank balance sheets and totaled $1,500 billion on September 1. Although not as large a category of loans as those secured by real estate, they are an important source of profitability for banks, and defaults on them is the last thing banks need during the current credit cycle. (Read more about what to look for on banking balance sheets at Analyzing A Bank's Financial Statements.)

The Federal Deposit Insurance Corporation (FDIC) reported in its Quarterly Banking Profile that only 0.89% of C&I loans was considered noncurrent. This percentage, however, was as of June 30 and has likely deteriorated further. (The FDIC's third-quarter numbers are expected around November 24.) Looking at previous credit cycles, the FDIC reported that noncurrent C&I loans peaked at more than 3% for banks with more than $1 billion in assets during the 2001 recession.

Nonperforming Assets Increasing
Fifth Third Bancorp (Nasdaq: FITB) reported total nonperforming assets of $2.8 billion as of September 30. About 20 percent, or $580 million, was in the C&I portfolio. This was a sequential increase of $144 million.

"We’d expect trends to follow those in the economy with more significant issues for companies with real estate exposures but softness in other areas like retail and manufacturing," said Mary Tuuk, chief risk officer for Fifth Third.

KeyCorp (NYSE: KEY) reported in its Q3 that nonperforming assets in the C&I category increased to $364 million, up from $124 million in Q3 2007. The sequential increase was $48 million.

"Commercial and industrial nonperforming loans are tied closely to the residential real-estate-related exposures," said KeyCorp CFO Jeffrey Weeden during the conference call.

Sovereign Bancorp (NYSE:SOV) pre-announced its Q3 results October 13 and saw nonperforming assets in its C&I portfolio increase to $155 million - double the $78 million reported in Q3 2007.

UnionBanCal (NYSE:UB) reported in its Q3 that nonperforming assets in its commercial, financial and industrial portfolio jumped 97.56% sequentially to $162 million. The company did not give further detail, but the bank is a major lender in California.

Bank of America (NYSE:BAC) reported in its quarter in early October that nonperforming assets in its commercial loan category rose to $1.61 billion, up $500 million sequentially.

C&I Delinquencies Will Hit Hard
Delinquencies are heading higher for C&I, a large category of loans. This will hit hard for banks already dealing with bad loans secured by real estate.

Learn about using nonperforming assets to measure banks' health in Texas Ratio Rounds Up Bank Failures.

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

Rate this Article: Your Rating: Overall Rating: Vote Now!

MORE STOCK ANALYSIS