Credit Market Barometer - Tour of North American credit conditions Third quarter 2018
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Credit Market Barometer Tour of North American credit conditions Third quarter 2018
Welcome to the seventh edition of the EY Credit Market Barometer (CMB).
Our breakouts of loan balance data across our three bank size composites are pointing
to widening differences in growth rates among banks. Universal banks, as a group,
are growing at a slower pace than regional banks. Some of the distinctions may be
due to lesser appetite for chasing deals, and some of the difference may be due to
competition from non-banks impacting larger banks more than smaller banks.
Undoubtedly, the economy’s strength is supporting healthy lending conditions.
The third quarter’s advanced estimate of real gross domestic product growth was
3.5%, down from the second quarter’s reading of 4.2%, but still stronger than any
reading since 2014. Unemployment held at 3.7% in October, and the most recent
Manufacturing ISM Report on Business, a leading indicator of health in the economy,
reflected continued expanding business strength, albeit at a somewhat slower pace
than September readings.
We cover two special topics in this edition: the possible impacts of Current Expected
Credit Loss (CECL) accounting and the coming transition away from interbank offer
rates (IBOR).
We hope you find the CMB informative, and we encourage you to reach out to the
contacts on the back cover for further insights on the state of North American lending
conditions.
ii | Credit Market Barometer
Credit Market Barometer
Table of contents
Overview
02 Snapshot of credit conditions
The US macro view
05 View on US macro indicators
Interest rates
08 Major lending rates and the yield curve
Wholesale lending
09 Trends in C&I and CRE lending
Consumer lending
18 Trends in consumer lending
Bank financial performance
29 Bank earnings
Capital and funding
34 Capital ratios, loan-to-deposit, efficiency
The Canadian market
37 Macro picture and bank performance in Canada
Special topics
45 Assessing CECL’s impact; Readying for IBOR transition
Regulatory snapshot
48 The latest regulatory developments
Appendix
51 Bank composites used in this report
Credit Market Barometer | iii
Executive summary
Credit Market Barometer — Q3 2018
“Since 1950, the US economy has experienced periods of low, stable inflation and periods
of very low unemployment, but never both for such an extended time as is seen in these
[macroeconomic] forecasts.”
— Jay Powell, Chairman of the Board of Governors of the Federal Reserve System
What we’re seeing
• Strong macroeconomic conditions should support modest near-term loan growth. Other key performance drivers
supportive of overall bank performance include realizing process efficiencies and competitive strengths.
• The Office of the Comptroller of the Currency (OCC) released its 2019 examination priorities in September,
highlighting that commercial and retail credit loan underwriting, concentration risk management, credit risk
management and Current Expected Credit Loss (CECL) preparations would be among its areas of higher focus over the
coming year.
Macro picture
• Real gross domestic product (GDP) growth climbed to 4.2% in Q2 2018, the best reading since Q3 2014. The first
estimate of Q3’s real GDP growth rate was also strong at 3.5%. Most macro indicators today are supportive of strength
in the economy.
• The flattish yield curve is one of very few negative indicators in the economy right now, although the curve’s steepness
did hold well in October, as 10-year Treasury rates climbed slightly.
Risks to the economy
• According to the U.S. Office of Financial Research (OFR) Financial System Vulnerabilities Monitor, the area of greatest
risk in the financial system today is market risk — specifically, high valuations and risk premiums. The OFR scores credit
risk as a medium-level risk vulnerability.
• Concerns about the current economic expansion ending soon are driving many firms’ interest in identifying and
understanding current economic vulnerabilities.
Loan growth
• The loan and lease balances of US commercial banks grew at a seasonally adjusted 3.8% rate year over year (YoY) in Q3
2018, after growing at rates of 5.0% and 3.6% in Q2 and Q1 2018, respectively (based on Fed H.8 data).
• Commercial and industrial (C&I) loans and closed-end residential mortgages led loan balance growth in Q3, rising 4.9%
and 4.7% YoY, respectively.
Bank performance
• Commercial banks’ Q2 2018 return on average equity (ROAE) was very strong. Overall bank ROAEs ran 2.81% higher in
Q2 versus averages across all quarters between year-end 2011 and Q3 2017.
• Earnings are likely to remain strong for the balance of 2018. We are watching deposit and loan betas — i.e., the
percentage of rate rises passed on to deposit holders and borrowers, as a focal point how earnings will evolve over the
near term.
1 | Credit Market Barometer
Overview
System leverage and loan growth
Overall leverage in the US financial system generally has moderated, as measured relative to US real GDP. Residential mortgage debt,
which had greatly shrunk relative to GDP, has leveled in recent quarters. US commercial banks’ loan and lease balances grew 3.8% YoY in
Q3, down from a 5.0% YoY growth rate in Q2.
Public, corporate, home mortgage, consumer debt-to-GDP (%) Leverage relative to GDP
120.0 • Total US government-related (public)
debt-to-real GDP dropped slightly to
96.4 103.8
100.0 103.8% in Q2 from 105.2% in Q1 2018,
but was up slightly from 102.5% one year
80.0 prior.
61.1
55.1 • Household mortgage debt was 55.1% of
60.0
real GDP in Q2, compared with 55.2% one
40.0 26.0 33.6 year prior.
20.0 • Nonfinancial corporate debt-to-real GDP
21.1
17.2 ratio was 33.6% in Q2, up slightly from
0.0 33.5% one year prior.
2011 2012 2013 2014 2015 2016 2017 2018
• Consumer debt (non-mortgage)-to-real
Public debt to US GDP Home mortgage debt to GDP
GDP ratio was 21.1% in Q2, up from
Consumer debt to GDP Nonfinancial corporate debt to GDP 20.7% one year prior.
Source: Federal Reserve Economic Data, latest available Fed Z.1 data
Total credit held by commercial banks Total credit and total loans and
leases
14,000 100.0
12,778 • Total US commercial bank credit holdings
90.0 were $12.79 trillion at the end of Q2
12,000
80.0 2018, up 4.2% from one year prior, which
9,185 was a slower growth rate than the four-
10,000 9,343 70.0
year CAGR of 5.9%.
8,000 60.0 • Total loans and leases held by US
6,614
commercial banks were $9.35 trillion at
50.0
6,000 Q2 2018, up 5.0% YoY; also slower than
50.5
40.0 the four-year compound annual growth
41.3
ratio (CAGR) of 5.8%.
4,000 30.0
2011 2012 2013 2014 2015 2016 2017 2018 • US commercial bank loans and leases
Total credit ($b) Total loans and leases ($b) relative to GDP were 50.5%, up from
Total loans and leases to real GDP (%) 49.5% one year prior.
Source: Federal Reserve Economic Data; total credit is all fixed income securities plus loans and leases
held by US commercial banks
Credit Market Barometer | 2Credit weather snapshot
The 12-month average of nonfarm payroll increases reached 210,000 in October, the highest level since April 2016. The US
unemployment has held at 3.7% for two consecutive months, marking a 50-year low. Hourly wages have risen 3.1% YoY to $27.30/hour,
also a relatively good number. Inflation fell to 2.3% YoY in September, down from 2.9% in July, as measured by the Consumer Price Index.
US macro
US nonfarm payrolls, mo. change (k) Unemployment rate, U-3 (%)
250 3.7
-802 -140 522 3.7 6.9 10.0
(Oct) 3/’09 Peak and trough since 2000 5/’10 (Oct) 5/’18 Peak and trough since 2000 10/’09
Real GDP, ann. change (%) Inflation, CPI, ann. change (%)
3.5 2.3
-8.4 -0.5 7.5 -2.0 1.8 5.5
(3Q) 4Q’08 Peak and trough since 2000 2Q’00 (Sep) 7/’09 Peak and trough since 2000 7/’08
Case-Shiller US housing pr. index (HPI) Expenditures, PCE, ann. change (%)
206 5.0
100 152 206 -3.0 3.0 9.0
(Aug) 1/’00 Peak and trough since 2000 6/’18 (Sep) 5/’09 Peak and trough since 2000 3/’00
US rates
LIBOR — 3 mo. (%) Mortgage rate US avg., 30-yr. fixed (%)
2.46 4.94
0.23 3.51 6.79 3.31 5.98 8.64
(Oct) 5/’14 Peak and trough since 2000 6/’00 (11/8) 11/’12 Peak and trough since 2000 5/’00
2-yr.–10-yr. UST spread (%) Fed funds effective rate (%)
0.29 2.19
-0.41 1.21 2.83 0.07 3.31 6.54
(Oct) 4/’00 Peak and trough since 2000 2/’10 (Oct) 7/’11 Peak and trough since 2000 7/’02
US bank credit growth
Ann. change loan/lease, comm. banks (%) Ann. change, total consmr. credit (%)
4.96 4.56
-7.65 2.49 12.64 -3.79 4.45 12.69
(2Q) 1Q’10 Peak and trough since 2000 4Q’05 (2Q) 1Q’10 Peak and trough since 2000 1Q’01
US bank asset quality
NPLs, all loans, comm. banks (%) NPLs, commercial loans (%)
1.02 0.74
0.70 3.17 5.64 0.49 2.05 3.61
(2Q) 2Q’06 Peak and trough since 2000 1Q’10 (2Q) 4Q’14 Peak and trough since 2000 3Q’09
US bank performance
ROAA, >$100b banks (%) ROAE, >$100b banks (%)
1.43 12.9
-0.58 0.44 1.45 -6.61 4.54 15.68
(2Q) 4Q’08 Peak and trough since 2005 4Q’06 (2Q) 4Q’08 Peak and trough since 2005 4Q’06
US bank capital
CET1 ratio, >$100b banks (%) Leverage ratio, >$100b banks (%)
12.6 9.34
7.86 10.25 12.63 6.34 7.84 9.34
(2Q) 3Q’05 Peak and trough since 2005 3Q’17 (2Q) 2Q’06 Peak and trough since 2005 2Q’18
Sources: EY, Federal Reserve Economic Data, S&P Global Market Intelligence
Note: Generally favorable or Generally not favorable or Generally neutral for banks
trending favorably for banks trending unfavorably for banks
3 | Credit Market BarometerUniform Bank Performance Report
Uniform Bank Performance Report (UBPR) data provides a stratified view of bank performance by asset size.
Size group >$100b $10b–$100b $3b–$10b $1b–$3b
Banks in group 25 89 143 369
Profitability
H1 2018 11.35 10.95 11.47 11.71
ROAE (%) 2017 8.72 8.46 8.85 9.26
2016 8.17 8.73 9.26 9.54
H1 2018 1.29 1.32 1.29 1.23
ROAA (%) 2017 1.00 0.99 0.99 0.97
2016 0.93 0.99 1.05 1.00
Yield on assets and cost of funds
H1 2018 3.19 3.83 3.94 4.03
Interest income (% avg. assets) 2017 2.92 3.57 3.74 3.90
2016 2.60 3.37 3.61 3.74
H1 2018 0.59 0.53 0.54 0.54
Interest expense (% avg. assets) 2017 0.41 0.37 0.40 0.43
2016 0.30 0.29 0.33 0.37
Non-spread income
H1 2018 1.66 0.89 0.93 0.84
Non-int. income (% avg. assets) 2017 1.62 0.90 0.93 0.86
2016 1.63 0.97 0.94 0.85
Efficiency
H1 2018 58.50 55.24 58.57 61.87
Efficiency ratio (%) 2017 60.47 56.30 58.80 62.06
2016 61.68 57.64 60.42 63.71
Funding
H1 2018 70.50 88.57 89.94 86.71
Net loans lease/total deposits (%) 2017 69.83 68.83 89.35 85.00
2016 68.46 67.26 88.74 83.85
Asset quality
H1 2018 0.87 0.64 0.62 0.62
90+PD non-accruals loans (%) 2017 0.97 0.71 0.62 0.66
2016 1.20 0.84 0.74 0.73
Capitalization
H1 2018 12.87 12.54 13.20 13.06
Common Equity Tier 1 ratio (%) 2017 12.91 12.45 12.95 12.96
2016 12.71 12.40 12.66 12.94
Source: Federal Financial Institutions Examination Council, UBPR
Notable points
• US corporate tax code changes are providing meaningful lifts to return on average equity (ROAE) and return on average assets (ROAA)
levels.
• Yields on earning assets are generally benefiting from rising rates, which are helping net interest margins, but the benefit will likely slow
as deposit betas are expected to rise.
• Overall asset quality, based on serious delinquencies (90d PD and non-accruals), is still trending favorably for banks.
Credit Market Barometer | 4The US macro view
Executive summary
• There are currently no material signs of slowing in the US economy. Core inflation, as measured by the personal consumption
expenditures (PCE) price index (ex-food and energy), was 2.0% in August, exactly on the Fed’s targeted rate for the measure.
• Wage inflation, while still low relative to historical averages between 1990 and 2007, has held above 2% on a monthly YoY basis for
the past two years. The most recent reading was 2.8% as of September, well above the average of approximately 1.8% in the 2009–14
period, when the economy was emerging from the financial crisis.
• Consumer confidence is near all-time peaks, as measured by the University of Michigan Survey of Consumers. If and as consumer
confidence remains high, GDP growth will be more likely to stay healthy across Q3 and Q4 2018.
US GDP and the unemployment rate are healthy and stable. Real GDP growth (third estimate) for Q2 2018 was 4.2%.
Real GDP growth (%) Real GDP growth
6.0 • GDP growth was 4.2% in Q2 2018, up
sharply from 2.2% in Q1. GDP growth is at
5.0 its highest level since Q3 2014.
4.2
4.0 • The acceleration in real GDP growth
in Q2 reflected accelerations in
3.0 personal consumption, exports, federal
Average: 2.4%
government spending, and state and
2.0
local government spending, as well as
1.0 a smaller decrease in residential fixed
investment.
–
2011 2012 2013 2014 2015 2016 2017 2018 • Economists expect GDP to remain strong
(1.0) over the balance of 2018, mostly because
personal consumption growth remains
(2.0) high.
Source: Federal Reserve Economic Data Last shown reading Q2 2018
5 | Credit Market Barometer“I think we need to make the right decisions based on our analysis of
where the economy is and where it’s heading. If that were to require us
to move interest rates up to the point where the yield curve was flat or
inverted, that would not be something I find worrisome on its own.”
— John Williams, President and CEO of the Federal Reserve Bank of New York,
quoted by The Wall Street Journal on September 13, 2018
Unemployment rate (%) Unemployment rate
9.0 • The September monthly unemployment
rate (released Oct. 5) was 3.7%, the
8.0 lowest reading in 50 years and well below
8.5 the quarterly average of 4.0% in Q2.
7.0
• The U.S. Labor Department reported in
6.0 October that August job openings had
topped 7m, outnumbering active job
5.0 seekers by 100k — the most ever.
4.0
• The number of unemployed persons
4.0 decreased by 270k to 6m in September.
3.0 • Employment in professional and business
2011 2012 2013 2014 2015 2016 2017 2018 services increased by 54k in September
and has risen by 560k over the year.
Unemployment rate
Source: Federal Reserve Economic Data Last shown reading Q2 2018, shows avg. of monthly
readings over quarter
US housing prices nationally are at an all-time peak. Corporate credit spreads for low-investment grade rated credits are still conducive for
corporate issuance; however, spreads rose sharply in Q2 2018.
Case-Shiller national housing price index (HPI) (%) HPI
220 • The US housing market continues to
204.4 exhibit strong pricing, as the U.S. National
200 Home Price Index reached 204.4 in June
2006 peak: 184.6 (and 205.4 in July), up from 198.9 in
180 March and 196.2 in December 2017.
160 • July’s reading represents a 6.0% annual
135.2
gain in housing prices, slightly down from
140 2012 trough: 134.0 a 6.2% reading in June.
• Seattle, Las Vegas and San Francisco are
120 seeing the highest year-over-year gains.
100 • Average US home prices are 11.2% above
2011 2012 2013 2014 2015 2016 2017 2018 the 2006 peak, but only somewhat over
HPI pre-crisis peaks for many larger, higher-
cost urban areas.
Source: Federal Reserve Economic Data Last shown reading Q2 2018
Credit Market Barometer | 6The US macro view continued
BBB corp yield (%) BBB corporate yield
5.0 • Average effective yields among BBB-
4.6 rated bonds rose by 30 basis points (bps)
4.4 to 4.39% as of the end of Q2 2018, and
4.5
up 80 bps from 3.59% at the end of Q4
2017. The move marked a reversal of a
4.0 tightening trend in 2017.
3.5
3.0
2011 2012 2013 2014 2015 2016 2017 2018
BBB Corp Yield
Source: Federal Reserve Economic Data, Last shown reading Q2 2018
ICE BofAML US Corporate BBB Index
What the Fed is focused on
On September 26, the Federal Open Market Committee (FOMC) raised the target federal funds rate to the 2.00% to 2.25% range. The FOMC
also updated its summary of economic projections, shown in the table below. We call out real GDP, unemployment and inflation measures —
noting that insofar as these projections, there are no overt signs of an economic downturn. We highlight the FOMC’s comments on the
effects of tariffs in the underlined portion of the meeting minutes quotes below.
Median Central tendency Range
Longer Longer Longer
Variable 2018 2019 2020 2018 2019 2020 2018 2019 2020
run run run
Change in real GDP 3.1 2.5 2.0 1.8 3.0–3.2 2.4–2.7 1.8–2.0 1.8–2.0 2.9–3.2 2.1–2.8 1.7–2.4 1.7–2.1
March projection
1
2.8 2.4 2.0 1.8 2.7–3.0 2.2–2.6 1.8–2.0 1.8–2.0 2.5–3.0 2.1–2.7 1.5–2.2 1.7–2.1
Unemployment rate 3.7 3.5 3.5 4.5 3.7 3.4–3.6 3.4–3.8 4.3–4.6 3.7–3.8 3.4–3.8 3.3–4.0 4.0–4.6
March1 projection 3.6 3.5 3.5 4.5 3.6–3.7 3.4–3.5 3.4–3.7 4.3–4.6 3.5–3.8 3.3–3.8 3.3–4.0 4.1–4.7
PCE inflation 2.1 2.0 2.1 2.0 2.0–2.1 2.0–2.1 2.1–2.2 2.0 1.9–2.2 2.0–2.3 2.0–2.2 2.0
March1 projection 2.1 2.1 2.1 2.0 2.0–2.1 2.0–2.2 2.1–2.2 2.0 2.0–2.2 1.9–2.3 2.0–2.3 2.0
Core PCE inflation 2.0 2.1 2.1 1.9–2.0 2.0–2.1 2.1–2.2 1.9–2.0 2.0–2.3 2.0–2.3
March1 projection 2.0 2.1 2.1 1.9–2.0 2.0–2.2 2.1–2.2 1.9–2.1 2.0–2.3 2.0–2.3
Federal funds rate 2.4 3.1 3.4 3.0 2.1–2.4 2.9–3.4 3.1–3.6 2.8–3.0 2.1–2.4 2.1–3.6 2.1–3.9 2.5–3.5
March1 projection 2.4 3.1 3.4 2.9 2.1–2.4 2.9–3.4 3.1–3.6 2.8–3.0 1.9–2.6 1.9–3.6 1.9–4.1 2.3–3.5
Source: Summary of economic projections, FOMC (Sep 2018)
1
Prior forecast projection from March 2018
• The FOMC noted in its September meeting minutes that “Evolving trade-related risks and other international developments reportedly
weighed somewhat on market sentiment. However, domestic economic data releases came in a bit above market expectations, on net,
with the stronger-than-expected average hourly earnings in the August employment report notably boosting Treasury yields. Nominal
Treasury yields moved up over the intermeeting period, with the 10-year yield rising above 3 percent.”
• The FOMC also noted that “Relative to the forecast prepared for the previous meeting, the projection for real GDP growth this year
was revised up a little, primarily in response to stronger-than-expected incoming data on household spending and business investment.
The projection for the medium term was not materially changed, in part because the recently enacted tariffs on Chinese goods and the
retaliatory actions of China were judged to have only a small net effect on U.S. real GDP growth over the next few years.”
7 | Credit Market BarometerInterest rates
Short-term rates have rocketed higher in 2018, tightening the spread between the longer and shorter ends of the curve. Implications for
banks include likely growing pressures on deposit rates.
Treasury yield curve (%) Key rates
• As of mid-October, 10-year U.S. Treasury
4.0
(UST) yield had climbed to its highest
level since May 2011, reaching 3.19%.
3.0 • The 6-month and 1-year UST rates have
risen 100 and 108 bps, respectively, over
the past year (as of September 7).
2.0
• The 1-month and 3-month LIBOR rates
have risen by about 92 bps and 101 bps,
1.0 respectively, to 2.11% and 2.32% over the
past year (as of September 7).
0.0 • The Prime rate is up about 100 bps over
the past year (following the September 26
1m 3m 6m 1y 2y 3y 5y 7y 10y 20y 30y
rate rise).
Most recent One month ago One year ago Three years ago
• The table below shows US deposit and
consumer lending rates, with 1-year
Source: S&P Global Market Intelligence Data as of Sep 7, 2018 changes over the past year at commercial
banks:
Product US avg. 1-yr chg.
Interest checking 0.12% 0.02%
Key rates (%) Money market $10k 0.29% 0.10%
New car loan — 36 mo. 4.08% 0.33%
6.0 New car loan — 60 mo. 4.30% 0.33%
Classic credit card 12.50% 0.29%
5.0
Rewards card 12.94% 1.00%
4.0 30-yr fixed mortgage 4.79% 0.75%
3.0
2.0
1.0
0.0
2014 2015 2016 2017 2018
1-month LIBOR 3-month LIBOR Prime rate 10-year Treasury
30-year fixed 6-month Treasury 1-year Treasury
Source: Federal Reserve Economic Data
Credit Market Barometer | 8Wholesale lending
Executive summary
• Wholesale loan balances nationally have grown steadily over the 12-month period ending Q2 2018, but on a quarter-over-quarter (QoQ)
basis, results were surprisingly tepid given higher strength in the economy. US universal banks showed especially weaker QoQ growth
in Q2 versus regionals (“On private equity [and] nonbank competition, I would say that is evident
in some of the wholesale categories. I think it’s probably most prominent
in our CRE category, where some of the paydowns that are occurring
are because of nonbank competition coming into the marketplace.”
— Super-regional bank CEO responding to an analyst’s question regarding
commercial lending competition during a Q3 2018 earnings call
Among all US commercial banks, C&I and commercial real estate (CRE) loan balances each grew by over 5% YoY in Q2 2018, the strongest
growth rates seen since Q1 2017. Higher economic activity contributed to some of the renewed strength. Corporate tax relief, which
arguably is helping economic growth, also may be causing a marginal reduction in the need for borrowing, especially on revolving line
balances. Rate rise impacts may also increasingly drive borrowers to more judiciously utilize loan facilities.
Total wholesale loan exposure ($b) Wholesale lending, all US commercial
banks
2,400 • Total wholesale exposure rose to $4.36
2,219 trillion as of Q2 2018, a 5.2% increase
YoY.
2,200 • C&I lending grew by 5.34% and 3.20%,
YoY and QoQ, respectively, while CRE
lending rose by 5.04% and 1.32% YoY and
QoQ, respectively.
2,000
• The Fed’s July 2018 Senior Loan Officer
2,139 Opinion Survey reported that banks had
eased their lending standards on C&I
1,800 loans to firms of all sizes in Q2, but kept
CRE lending standards unchanged.
• Overall, lending standards for C&I loans
1,422 are on the easier end of ranges seen since
1,600
2005, whereas lending standards for CRE
loans are on the tighter end of the range.
1,400
1,200
1,306
1,000
2011 2012 2013 2014 2015 2016 2017 2018
C&I loan exposure CRE loan exposure
Source: Federal Reserve Economic Data; last shown reading end of Q2 2018
Credit Market Barometer | 10Wholesale lending continued
C&I lending encompasses a significant number of loan subcategories (e.g., vendor equipment finance, small business loans, middle
market) that together make the loan class somewhat of a bellwether for lending overall. Growth across C&I overall, among our 3 bank
composites, was especially strong in our regional bank composite. Note: the composites below include 6 banks in the universal group,
16 banks in the super-regional group and 46 banks in the regional group.
C&I lending by bank segment ($b) C&I lending, US composites
• C&I loan balances grew 5.06% YoY for
1,000
861 universal banks, 3.64% for super-regional
banks and 10.49% for regional banks,
800 604
respectively, in Q2 2018.
600 • Universal banks surprisingly experienced
526
the weakest quarterly growth in C&I
315 balances, at just 0.37% in Q2. Wells
400
Fargo’s CEO noted in the company’s Q2
181 earnings call that C&I was “good, but not
200 77
great.”
0 • BB&T’s CEO noted the following regarding
2011 2012 2013 2014 2015 2016 2017 2018 Q2 earnings: “We had very strong [overall
growth] in C&I, which was up 6.3%.
Universal banks Super-regional banks Regional banks
Strong performance in a number of areas
— our corporate banking and mortgage
Source: S&P Global Market Intelligence
warehouse lending.”
C&I loan delinquency rate (%) • C&I delinquency rate, US composites
3.0 • Delinquent loans fell 7 bps and 18 bps in
Q2 2018 for super-regionals and regionals,
respectively, but rose by 5 bps for universals.
1.96
2.0 1.68
1.49
1.12
1.0
1.35
0.81
0.0
2011 2012 2013 2014 2015 2016 2017 2018
Universal banks Super-regional banks Regional banks
Source: S&P Global Market Intelligence
11 | Credit Market BarometerWholesale lending continued
C&I asset quality across all US commercial banks generally improved in Q2 and remains very strong. Delinquency rates and (NCO) are off
the cycle troughs reached during the 2014–15 period. The reduced tax rates have provided new capacity for debt servicing for profitable
commercial borrowers.
C&I delinquency rate vs. cycle peak and trough (%)* C&I delinquency rate, all US
commercial banks
5.0 4.35 • The overall C&I delinquency among
US commercial banks dropped by 4
4.0 bps during Q2 2018 to 1.07%, the
eighth consecutive quarterly drop in
delinquencies. C&I delinquencies remain
3.0
above the current cycle trough level of
0.72%.
2.0 1.07
1.65
• The current trend is attributable to both
1.0 0.72 the healing of the oil and gas sector and
the economy’s strength.
0.0
2011 2012 2013 2014 2015 2016 2017 2018
Delinquency rate Cycle peak (Q3 2009) Cycle trough (Q4 2014)
Source: Federal Reserve Economic Data
C&I NCO rate vs. cycle peak and trough (%)* C&I NCO rate, all US commercial
banks
3.0 2.57 • The C&I NCO rate fell by 5 bps to 0.26% in
Q2 2018.
2.5
• Q2’s NCO rate was 12 bps lower than the
2.0 0.38% rate recorded at the end of Q2
2017.
1.5 0.68
1.0 0.17
0.26
0.5
0.0
2011 2012 2013 2014 2015 2016 2017 2018
NCO rate Cycle peak (Q3 2009) Cycle trough (Q1 2015)
Source: Federal Reserve Economic Data
*Data captures all US commercial banks
Credit Market Barometer | 12Wholesale lending continued
The leveraged loan market saw record volume in 2017 as high appetites for yields among institutional investors drove many issuers to take
advantage of robust conditions. The market’s appetite for leveraged loans has continued in 2018. Lending providers among the nonbank
universe, large alternative investment managers notably, continue to express emphasis on putting credit fund money to work.
Volume of annual US dollar-denominated new-issue global leveraged loans ($b) Leveraged lending
• Global leverage loan new money
800 production volume was $372 billion
through Q2 2018, on pace to break last
year’s level of $652 billion, according to
600 S&P Global Market Intelligence data.
• Institutional volume (generally, term
400 loans with bullet repayments sold to
504 institutional investors) represented 74%
of leveraged issuance in the first two
200 274 quarters of 2018.
148 97 • Technology, financial (services and
0 leasing), oil and gas and health care
2010 2011 2012 2013 2014 2015 2016 2017 2018 sectors have been among the largest
Pro rata Institutional sectors borrowing leveraged loans.
Source: S&P Global Market Intelligence
LTM default rate of all leveraged loans (%)* Default rates
6.0 • The prior 12-month default rate by dollar
volume for leveraged loans as of June 30,
5.0 2018, stood at 1.95%, dropping 47 bps
from last quarter.
4.0
• iHeartCommunications remains the
largest defaulter of the year, with $6.3
3.0 2.42
1.95 billion default in March.
2.0
1.0
-
2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: S&P Global Market Intelligence
* Source: Thomson Reuters LPC Leveraged Loans monthly report in April 2018
13 | Credit Market BarometerWholesale lending continued
Leveraged loan spreads also reflected the high appetites for non-investment-grade corporate debt, driving spreads to post-crisis lows.
Quarterly average new-issue B+/B spreads (LIBOR+X bps) Leverage loan spreads (single-B)
• High and mid single-B rated leveraged
550 loans sold to institutional buyers at a 360
bps spread to LIBOR in Q2 2018, a 17-
bps increase QoQ.
450 • The pro rata leveraged loan market also
360 saw prices widen, by 7 bps in Q2.
350 353
250
2010 2011 2012 2013 2014 2015 2016 2017 2018
Pro rata Institutional
Source: S&P Global Market Intelligence
Quarterly average new-issue BB/BB– spreads (LIBOR+X bps) Leverage loan spreads (double-B)
450 • Pro-rata spreads dropped by 72 bps to
193 bps after a 40-bps increase in Q2,
while institutional spreads dropped to
219 bps.
350
250 219
193
150
2010 2011 2012 2013 2014 2015 2016 2017 2018
Pro rata Institutional
Source: S&P Global Market Intelligence; data not available for Q4 2014 and Q1 2015 data points
Credit Market Barometer | 14Wholesale lending continued
CRE lending growth among our tracked bank groups was mixed. Super-regional banks took less part in the overall good conditions.
CRE lending by segment ($b) CRE lending, US composites
• Universal and regional banks grew their
400 381 CRE portfolios by 1.56% and 8.78%, YoY,
263
321 while super-regional banks experienced
a 0.61% YoY decline. CRE exposures at
300
regional banks have grown at a four-year
300 CAGR of 12.4% in comparison with CAGR
200 of 7.20% and 4.45% for universal and
250 super-regional banks, respectively.
• JPMorgan Chase comments from Q2
100
142 earnings: “CRE loans were up 4% year on
year and flat versus last quarter, as there
0 continues to be a lot of competition for
2011 2012 2013 2014 2015 2016 2017 2018 high-quality assets and we are selective
given where we are in the cycle.”
Universal banks Super-regional banks Regional banks
Source: S&P Global Market Intelligence
CRE loan delinquency rate (%) CRE delinquency rate, US composites
8.0 • Delinquency rates remained flat for
super-regional banks through Q2 2018
6.28 on a QoQ basis, while universal banks saw
6.0 a decline of 13 bps and regionals saw a
decline of 2 bps.
4.0 • YoY, delinquencies have declined at
universal and super-regional banks,
although marginally.
0.59
2.0
0.0
2011 2012 2013 2014 2015 2016 2017 2018
Universal banks Super-regional banks Regional banks
Source: S&P Global Market Intelligence
15 | Credit Market BarometerWholesale lending continued
The graphs below show total CRE lending across our three bank composites, with breakouts of multi-family and construction and land
development loan types. The data shows how multi-family has begun some tapering after rapidly growing during the 2014–16 period.
Asset quality remains uniformly very good.
CRE lending by loan type ($b) CRE lending, loan types within US
composites
800 • A YoY comparison reveals growth of
3.01% for nonfarm/nonresidential
620 exposure, 2.49% for multi-family CRE and
600
437 4.58% for construction/land development
exposure.
400
213
110
155
200
0
2011 2012 2013 2014 2015 2016 2017 2018
Nonfarm/nonresidential CRE loan exposure Multi-family CRE loan exposure
Construction/land development CRE loan exposure
Source: S&P Global Market Intelligence
CRE loan delinquency rates by loan type (%) CRE delinquencies, loan types within
US composites
20.0
15.41 • Delinquency rates declined and were
0.75% for nonfarm/nonresidential
15.0 loans, 0.20% for multi-family residential
loans, and 0.62% for construction/land
development loans, as of Q2 2018.
10.0 4.59
2.77
5.0 0.62
0.0
2011 2012 2013 2014 2015 2016 2017 2018
Nonfarm/nonresidential CRE loan exposure Multi-family CRE loan exposure
Construction/land development CRE loan exposure
Source: S&P Global Market Intelligence
Credit Market Barometer | 16Wholesale lending continued
The asset quality of CRE loans across all US commercial banks is also in very good health, with delinquencies below pre-crisis levels and at
current cycle lows. Net charge-offs did tick higher at the end of 2017, but remain exceptionally low overall.
CRE delinquency rate vs cycle peak and trough (%)* Delinquency rates, all US commercial
banks
10.0 8.76 • Commercial real estate delinquencies
hover at very low base levels, as loan
8.0 volumes continue to rise.
6.11
• Delinquencies on all CRE loans
6.0
outstanding at commercial banks
dropped slightly in Q2 2018, to a new
4.0
low of 0.72%, compared with 0.74%
0.72 in the previous quarter. Delinquencies
2.0
were 5 bps lower in Q2 2018 versus
0.72
Q2 2017.
0.0
2011 2012 2013 2014 2015 2016 2017 2018
Delinquency rate Cycle peak (Q2 2010) Cycle trough (Q2 2018)
Source: Federal Reserve Economic Data
CRE NCO rate vs cycle peak and trough (%)* Net charge-offs, all US commercial
banks
4.0
3.13 • The net charge-off rate on CRE loans was
0.01% in Q2, down from 0.03% in the
3.0
previous quarter.
• The CRE NCO rate has been no higher
2.0 1.22 than 0.02% every quarter since Q4 2015.
1.0
0.01
(0.01)
0.0
2011 2012 2013 2014 2015 2016 2017 2018
-1.0
NCO rate Cycle peak (Q4 2009) Cycle trough (Q3 2016)
Source: Federal Reserve Economic Data
*Data captures all US commercial banks
17 | Credit Market BarometerConsumer lending
“Consumers have significantly altered their approach to retail credit following the Great
Recession. With hundreds of thousands of homeowners going underwater on their
mortgages, and the ability to gain access to credit becoming more difficult for millions of
consumers, a massive shift in how consumers prioritized and pay their debts has taken
place.”
— Lead researcher for a major credit reporting agency
Executive summary
• Consumer loan balances across all US commercial banks were up 4.2% YoY at the end of Q2. Non-mortgage-related loans drove the
growth, with regional banks leading the way.
• A study on consumer retail behavior 10 years after the start of the Great Recession notes several interesting observations:
• A significant increase (improvement) in credit scores, with over 60% of consumers having a score of 661 or higher, up from only 51% in
2008
• A 50% decrease in subprime mortgage originations as compared to 2008
• The highest credit card ownership level, at 176 million, but with the largest portion of annual credit card (over 8%) occurring in the
super-prime/reward card space
• Unprecedented growth and acceptance of unsecured consumer loans, primarily provided by financial technology (FinTech) firms and
used for low-rate debt consolidation
• Numerous industry publications indicate that consumer debt is now either near or at record levels. Yet consumer loan growth for
universal, super-regional and regional composites we track is weaker than broader industry averages across the major product areas
(mortgage, auto, credit card and other consumer).
• A new joint report by the Federal Reserve Bank of New York (FRBNY) and NYU Stern suggests that originations by FinTech firms are
becoming more meaningful. The report indicates that in 2014, FinTech firms held a little less than 2% market share in consumer loans,
but by 2016, that share had grown to 8%. Some are now estimating it could reach as high 20% by the end of 2018, especially in the
mortgage and other consumer product lines. FinTech firms may also be picking up a disproportionate share of the subprime market.
Credit Market Barometer | 18Consumer lending continued
Loan growth in the consumer space continues to advance at an accelerating rate to historic levels. Additionally, the level of true consumer
indebtedness may be even higher due to the growing presence of FinTech lending in both residential real estate and consumer installment
lending.
Total consumer loan exposure ($b) Consumer loan exposure, all US
commercial banks
2,400 • Total consumer loan balances at US
2,085 commercial banks grew by 1.2% QoQ and
2,208 4.2% YoY in Q2 2018. The period ended
2,200 at $3.67 trillion.
• The growth was driven by nonresidential
2,000 loans, which rose 7.1% YoY versus
4.5% YoY growth one year prior. The
acceleration is notable in part because
1,800 interest rates have continued to rise over
the period.
• Residential real estate loan balances grew
1,600
just 2.2% YoY in Q2 2018 — slightly better
1,464 than the 1.6% prior YoY rate ending
Q2 2017. Growth is modest due to the
1,400
inclusion of the home equity line of credit
1,103 (HELOC) in this series.
1,200 • There is evidence to suggest that US
commercial banks’ slower growth in the
residential mortgage is in part caused by
1,000 the continued rise of nonbank originators.
2011 2012 2013 2014 2015 2016 2017 2018 Research by the Federal Reserve Bank of
New York and NYU Stern has highlighted
Residential real estate exposure Consumer loan exposure how FinTech firms are often winning the
race on ease of service with traditional
Source: Federal Reserve Economic Data; quarter-end data, last shown reading Q1 2018 mortgage lenders. Nonbank FinTech
lenders (as classified by FRBNY research)
had achieved $161 billion origination
volume, and an 8% share of the total
residential mortgage market in 2016,
based on Home Mortgage Disclosure
Act data. The resulting report predicts
significant further increases in origination
share.
19 | Credit Market BarometerConsumer lending continued
Residential real estate (RRE) lending continued its trend of weak growth, with the universal and super-regional composites posting YoY
declines, while asset quality continued improving.
Note: the composites below include 6 banks in the universal group, 16 banks in the super-regional group and 46 banks in the
regional group. See Appendix for more information on these composites.
RRE lending by composite ($b) RRE lending, US composites
• RRE loan balances among the
1,200
universal banks have declined by
1,174 1,017 0.23% CAGR over the past four years
ending Q2 2018. Regional banks,
800 on the other hand, have grown RRE
balances at a 7.5% CAGR over the
353 same period.
400 384 • On a dollar-volume basis, the
102 impressive growth rate of the
192
regional banks is less impressive
when considering that represents
0
just $28 billion in balance increases
2011 2012 2013 2014 2015 2016 2017 2018
among the 46 banks in the last two
Universal banks Super-regional banks Regional banks years (2016–18). Universal banks
and super-regionals saw balances
Source: S&P Global Market Intelligence
decline by $3 billion and $8 billion,
respectively, over last two years.
• The evidence of rising FinTech
disruption in the mortgage market
RRE loan delinquency rate (%) is clearer. A recent study by the
Mortgage Bankers Association
20.0 15.37 showed that declining loan volumes,
rising interest rates and increased
competition have led the ratios
15.0
of current pretax income-to-loan
balances to drop to 31 bps, the
7.65
10.0 lowest point since fall 2008.
4.54 RRE delinquencies, US composites
5.0
6.48 • Delinquency rates for RRE for all bank
2.97 types slightly improved in Q2, with
0.0 the universal composite at 4.54%, the
2011 2012 2013 2014 2015 2016 2017 2018 regionals at the same level and the super-
regional composite at 2.97%.
Universal banks Super-regional banks Regional banks
Source: S&P Global Market Intelligence; data includes delinquencies of loans held with federally backed
guarantees
Credit Market Barometer | 20Consumer lending continued
The steady decline of the HELOC is continuing. The limited availability of interest-only HELOCs and the steady rise of interest rates are
driving demand for HELOCs far lower. Meanwhile, homeowners’ capacity for HELOCs is climbing to an all-time high at current home
valuations. Asset quality for closed-end, one-to four-family mortgages overall continues to improve, while HELOCs hold steady.
RRE lending by loan type ($b) RRE loan types (within our three
composites)
1,600 • HELOCs continued to decline, down $70
1,181 1,327 billion or 10% YoY.
1,200 • According to the Mortgage Monitor
Report, tappable equity held by
homeowners grew by $820 billion
800 over the last 12 months (ending March
449
2018) at $5.8 trillion nationwide. This
represents the highest rate of untapped
400 265 equity recorded (16% above 2006 levels),
and yet HELOC portfolios continue their
0 double-digit decline.
2011 2012 2013 2014 2015 2016 2017 2018
Total closed-end, 1- to 4-family HELOC
Source: S&P Global Market Intelligence; HELOC balances are included in the overall residential mortgage
values shown in the graph
RRE loan delinquency rates by loan type ($b) RRE delinquency rate (within our
20.0
three US composites)
16.86
• Delinquency rates on closed-end, one- to
four-family residences continued their
15.0 steady improvement, declining to 4.51%
(a new seven-year low), while delinquency
performance in HELOC loans remained
10.0
steady at 3.58%.
3.36 4.51
5.0
3.58
0.0
2011 2012 2013 2014 2015 2016 2017 2018
Total closed-end, 1- to 4-family HELOC
Source: S&P Global Market Intelligence; HELOC delinquencies are included in the overall residential
mortgage values shown in the graph
21 | Credit Market BarometerConsumer lending continued
Delinquencies and losses in the RRE continue to decline. NCO rates for residential mortgages reached a new low in Q2.
RRE delinquency rate vs. cycle peak and trough (%)* RRE delinquencies, all US
commercial banks
14.0
11.54 • Overall 30-day+ delinquency rates
12.0 for residential real estate (including
HELOCs) continued to decline,
10.0
dropping 22 bps to end Q2 2018 at
8.0 10.29 3.25%.
6.0 • Although continuing to trend
downward, albeit at a slower
4.0
1.41 3.25 pace from the previous years,
2.0 delinquencies remain above their pre-
financial-crisis low of 1.41%, recorded
0.0
2011 2012 2013 2014 2015 2016 2017 2018 in Q4 2004.
Delinquency rate Cycle peak (Q1 2010) Pre-crisis trough (Q4 2004)
Source: Federal Reserve Economic Data
RRE NCO rate vs. cycle peak and trough (%)* RRE net charge-offs, all US
3.0
commercial banks
2.75
• With recoveries exceeding losses in Q2
1.35 2018, the annualized NCO rate for RRE is
2.0 negative this quarter at -0.01%, which is a
new low in the current credit cycle.
1.0
(0.01)
(0.01)
0.0
2011 2012 2013 2014 2015 2016 2017 2018
-1.0
NCO rate Cycle peak (Q4 2009) Cycle trough (Q2 2018)
Source: Federal Reserve Economic Data
*Data captures all US commercial banks
Credit Market Barometer | 22Consumer lending continued
Delinquency rates have moderated in 2018, rising by only a few basis points and ending a trend toward sharp second-quarter increases.
This was particularly true at the universal banks, which only saw a modest five-bps increase in Q2. At the same time, growth in this space
has stalled.
Auto lending by composite ($b) Auto lending, US composites
• Overall growth in consumer auto has
250 stalled with total exposures of $353
205
billion in line with last year’s Q2 2017
200 total of $355 billion.
136
• What little growth that exists is coming
150 from the super-regional banks, up $10
135 billion YoY to $205 billion, up 5.1% YoY.
100
117 • Conversely, universal lenders decreased
in size in Q2 2018, declining by almost
50 8% to $135 billion.
5 13
0
2011 2012 2013 2014 2015 2016 2017 2018
Universal banks Super-regional banks Regional banks
Source: S&P Global Market Intelligence
Auto delinquency rate (%) Auto delinquencies, US composites
5.0 • While up across all composites, auto
delinquency rates rose at a slower
4.0 pace than typically observed in Q2. For
2.51 3.48 example, delinquency rates in universal
banks rose by 17 basis points to 1.65%
3.0
2.22 in Q2 2017, but only increased slightly
to 1.77% in 2018. Similar examples were
2.0 1.77
also observed in the super-regional and
regional composites.
1.0 1.18
1.83 • A recent report by Credit Karma indicated
that 1/5 (19%) of all new auto loans had
0.0 FICO scores below 620, suggesting that
2011 2012 2013 2014 2015 2016 2017 2018 there is significantly lower credit quality
Universal banks Super-regional banks Regional banks building in auto.
Source: S&P Global Market Intelligence
23 | Credit Market BarometerConsumer lending continued
The five-year trend of increasing auto loan delinquencies continues into the first half of 2018, but there is some indication that this
advance may be slowing. The auto NCO rate in Q2 decreased, YoY, for the first time in at least seven years. An additional indicator that
auto defaults may be nearing the end of their increasing trend: a recent Equifax report indicated that auto lenders have reduced subprime
lending by almost 10% since January 2017.
Auto delinquency rate vs. cycle peak and trough (%)* Auto delinquencies, all US
commercial banks
3.0
• Although still below the seven-year high
2.66
delinquency rate set in Q4 2017, the
2.5 second quarter saw a modest increase in
overall delinquencies, from 2.16% in Q1
1.98
2.31 2018 to 2.31% at the end of Q2.
2.0
• Auto delinquencies were also up YoY,
climbing 22 basis points from last year’s
1.5 rate of 2.09%.
1.47 • Recent Bloomberg reports cite subprime
lending as the principal cause of the rise
1.0
in auto delinquencies, with 60-day past-
2011 2012 2013 2014 2015 2016 2017 2018 due levels for subprime accounts at a
Delinquency rate Cycle peak (Q4 2017) Cycle trough (Q1 2012) 20-year high of 5.8%.
Source: S&P Global Market Intelligence
Auto NCO rate vs. cycle peak and trough (%)* Auto net charge-offs, all US
commercial banks
1.2
1.02 • Second-quarter YoY losses in consumer
1.0 auto are down for the first time in seven
0.69 years, decreasing by one basis point to
0.8 0.66 0.69%.
0.6 • NCO rates follow a consistent seasonal
pattern of first- and second-quarter
0.4 decreases, followed by increases in loss
rates in the later half of each year.
0.2 0.34
0.0
2011 2012 2013 2014 2015 2016 2017 2018
NCO rate Cycle peak (Q4 2017) Cycle trough (Q2 2012)
Source: S&P Global Market Intelligence
*Data captures all US commercial banks
Credit Market Barometer | 24Consumer lending continued
Credit card balance growth remains moderate, with a 12-month increase of about 5%; average usage is up about 3%, and delinquencies are
up only slightly versus last year.
Credit card lending by composite ($b) Credit card lending, US composites
• Credit card loan outstanding balances
500 413 increased YoY by only $37 billion, ending
418 Q2 2018 at $697 billion; an annual
400 growth rate of just 5.3%.
• The majority of the YoY growth originated
300 187 269 within our super-regional composite, up
$23 billion, or 9.3% YoY.
200
• Although up about 3% YoY, credit card
growth at the universal banks has been
100
7 essentially unchanged since 2011.
9
0
2011 2012 2013 2014 2015 2016 2017 2018
Universal banks Super-regional banks Regional banks
Source: S&P Global Market Intelligence
Credit card delinquency rate (%) Credit card delinquencies, US
composites
4.0
3.50
• Credit card delinquency rates ticked
2.99 2.53 up slightly versus Q2 2017, with the
3.0 universal composite up three bps and the
super-regional and regional composites
up eight bps each.
2.0
• A recent Business Insider report on credit
2.83 2.00 card usage showed overall consumer
1.0 credit card indebtedness up only 2.6% to
$5,472 as of Q1 2018.
• Usage patterns, not surprisingly, are very
0.0
different among generational groups,
2011 2012 2013 2014 2015 2016 2017 2018
with Gen-Xers posting the highest average
Universal banks Super-regional banks Regional banks credit card debt of $7,029 and Gen-Z
users having the lowest at only $1,181.
Source: S&P Global Market Intelligence
25 | Credit Market BarometerConsumer lending continued
Delinquency and loss performance, while clearly above the cycle lows seen in 2015, remains relatively strong.
Credit card delinquency rate vs. cycle peak and trough (%)* Credit card delinquency rate, all US
commercial banks
7.0 6.61 • The delinquency rate for credit cards
6.0
dropped 19 bps to 2.35% from Q1, and
was equal with the level from the previous
5.0 year.
3.32
4.0 • Q3 2017 (2.57%) saw the highest
delinquency rate since Q1 2013.
3.0 2.35
2.0
1.0 2.01
0.0
2011 2012 2013 2014 2015 2016 2017 2018
Delinquency rate Cycle peak (Q4 2009) Cycle trough (Q1 2015)
Source: Federal Reserve Economic Data
Credit card NCO rate vs. cycle peak and trough (%)* Credit card NCO rate, all US
commercial banks
12.0 10.97
• Credit card net charge-offs of 3.74% were
10.0 up slightly (10 bps) from the previous
year but down (6 bps) from the previous
8.0 4.53 quarter.
6.0 • Q1 2018 (3.80%) saw the highest
3.74 delinquency rate since Q2 2012.
4.0
2.0
2.76
0.0
2011 2012 2013 2014 2015 2016 2017 2018
NCO rate Cycle peak (Q4 2009) Cycle trough (Q3 2015)
Source: Federal Reserve Economic Data
*Data captures all US commercial banks
Credit Market Barometer | 26Consumer lending continued
Loan balances within other consumer loans have overall trended lower among universal banks, consistent with trends seen for universals
in mortgage and auto portfolios. The decline in the universal composite was in part due to Citi’s selling of its OneMain subsidiary in late
2015. The super-regional and regional groups, in contrast, continue to push into this space. The rise of loan balances in the super-regional
composite in 2016 was due to a reclassification of American Express’s loan balances from other loans to other consumer loans.
Other consumer lending by composite ($b) Other consumer loans, US segment
composites
140 123 • The other consumer loan category
120 remains a mixed story, with concerted
focus on the space among several of the
100 94
61 super-regional and regional banks.
80 • Universal banks achieved just 1.3% YoY
74
growth in other consumer balances,
60
whereas super-regionals were up 7.9%
40 7 YoY, and regionals were up 12.3% YoY.
20 13 • American Banker analysis covered
earlier in 2018 indicated that consumer
0 installment lending, primarily point-of-
2011 2012 2013 2014 2015 2016 2017 2018 sale loans, were up 30% since 2012, with
Universal banks Super-regional banks Regional banks US regional banks leading the way.
Source: S&P Global Market Intelligence
Other consumer delinquency rate (%) Other consumer loan delinquencies,
US segment composites
7.0 6.15
6.07 • Delinquencies continue their
6.0
downward trend for other consumer
5.0 loans, with YoY declines across all
2.96 bank groups (universal banks down
4.0 5.71
27 bps, super-regionals down 35 bps
3.0 and regional banks down 20 bps).
1.66
2.0
1.0 1.23
0.0
2011 2012 2013 2014 2015 2016 2017 2018
Universal banks Super-regional banks Regional banks
Source: S&P Global Market Intelligence
27 | Credit Market BarometerConsumer lending continued
Delinquency and loss performance in the other consumer loan category across all US commercial banks is at or very near historic lows.
Other consumer delinquency rate vs. cycle peak and trough (%)* Other consumer loan delinquencies,
all US commercial banks
6.0 5.20 • Other consumer loan overall
5.0
delinquencies declined further by 20 bps
to 1.91% in Q2 2018, hitting a seven-year
4.0 5.20
low.
• Delinquencies have dropped 25 bps
3.0
compared to the previous year.
2.0 1.91
1.91
1.0
0.0
2011 2012 2013 2014 2015 2016 2017 2018
Delinquency rate Cycle peak (Q4 2011) Cycle trough (Q2 2018)
Source: S&P Global Market Intelligence
Other consumer NCO rate vs. cycle peak and trough (%)* Other consumer loan NCO rate, all
US commercial banks
3.5 3.23 • Charge-offs remained flat at 1.14% from
3.0 the first quarter of 2018 and are up only
2.45 21 basis points from their record low of
2.5 0.93%.
2.0
1.14
1.5
1.0
0.93
0.5
0.0
2011 2012 2013 2014 2015 2016 2017 2018
NCO rate Cycle peak (Q4 2010) Cycle trough (Q3 2015)
Source: S&P Global Market Intelligence
*Data captures all US commercial banks
Credit Market Barometer | 28Bank financial performance
Executive summary
• Net interest income (NII), net interest margins (NIM), net income and ROAA and ROAE mostly continue to trend favorably due to rising
rates, lower tax rates and the continued favorable economy.
• Early Q3 earnings are generally beating analyst expectations, driven by strong growth across segments (e.g., consumer and capital
markets).
• As rates rise, analysts are watching deposit and loan betas, which measure the percentage of benchmark rate increases that are passed
on to depositors and borrowers. Thus far, deposit betas have been very low, but they are expected to rise. Loan betas have been higher.
The effects are reflected in stronger NII levels shown in our composites.
• With capital levels holding strong, many banks are aiming to boost capital distributions via both share repurchases and dividends.
The NASDAQ banking index had outperformed the S&P 500 Index through the first half of 2018, but the index has lost ground in the July-
through-October period. The market appears concerned about the benefits and risks of rising rates and the impact on loan growth. Net
incomes of banks have strongly risen YoY in 2018, due in large part to reduction of US corporate tax rates.
NASDAQ bank index, S&P 500 Index year-to-date price changes NASDAQ bank index
• The NASDAQ IXBX index had risen
1.15 2.2% for the nine-month period ending
Q3 2018, recently diverging with the
1.10 performance of the S&P 500 Index.
108.5%
• Bank valuations, as measured by price-to-
1.05 tangible book values of 329 public banks
102.2% in the SNL Bank Index, averaged 1.99x as
1.00 of the end of Q3 2018. That was up from
a level of 1.94x one year prior, but down
0.95 from the peak of 2.17x seen in the third
week of January 2018.
0.90
12/2017 3/2018 6/2018 9/2018 12/2018
NASDAQ bank S&P 500
Source: NASDAQ
29 | Credit Market Barometer“Of the 5,542 insured institutions reporting second quarter financial
results, more than 70 percent reported year-over-year growth in
quarterly earnings. The percent of unprofitable banks in the second
quarter declined to 3.8 percent from 4.3 percent a year ago.”
— FDIC Quarterly Banking Profile for Second Quarter 2018
Net income by composite ($b) Net income
40 • YoY earnings at all bank groups increased
30 in Q2 2018. Earnings at universal, super-
regional and regional banks increased
30 12
16.5%, 31.7% and 49.0%, respectively,
YoY. This was due to higher rates, a
20 5 12 lower effective tax rate since January
2018 and the continued favorable credit
10 1 environment.
4 • The dip in Q4 2017 can be attributed to
0 the earnings impacts of the 2017 Tax
2011 2012 2013 2014 2015 2016 2017 2018 Cuts and Jobs Act.
-10
Universal banks Super-regional banks Regional banks
Source: S&P Global Market Intelligence
NII and NIM continue to increase steadily in 2018 primarily due to loan growth and the Fed’s rate increases.
Net interest income by composite ($b) Net interest income
• NII for Q2 2018 increased YoY across all
60 bank groups. Regional banks experienced
48
53
a 16.8% increase, followed by super-
50
regional and universal banks at 8.1% and
4.9%, respectively.
40
19 • The increase in NII was due to a continued
30 26 increase in interest-bearing assets.
20
5 10
10
0
2011 2012 2013 2014 2015 2016 2017 2018
Universal banks Super-regional banks Regional banks
Source: S&P Global Market Intelligence
Credit Market Barometer | 30Bank financial performance continued
Net interest margin by composite (%) Net interest margin
• NIMs expanded YoY across all bank
5.0
4.02 groups as the increase in earnings for
3.86
interest-bearing assets continues to
4.0 outpace the increase in funding costs.
3.61
• Universal banks experienced a 5-bps
3.0 3.83
increase in NIM while super-regional and
regional banks experienced an increase of
2.0 1.90 8 bps each.
1.0 2.02
0.0
2011 2012 2013 2014 2015 2016 2017 2018
Universal banks Super-regional banks Regional banks
Source: Federal Reserve Economic Data
Non-interest income by composite ($b) Non-interest income
• YoY, non-interest income rose across all
70
45 composites at rates of 4.1%, 10.3% and
60 4.5% for universal, super-regional and
58 regional banks, respectively.
50
40
15
30
20 20
10 2
3
0
2011 2012 2013 2014 2015 2016 2017 2018
Universal banks Super-regional banks Regional banks
Source: S&P Global Market Intelligence
31 | Credit Market BarometerBank financial performance continued
Non-interest expense by composite ($b) Non-interest income
100 • YoY, non-interest expense increased
4.6%, 6.6% and 13.7% for universal,
super-regional and regional banks,
80 72
respectively.
68
60 • Efficiency programs, including branch
closures, continue across the US while
40 firms make targeted investments into
customer-facing and non-customer-facing
23 27 technology.
20
5 8
0
2011 2012 2013 2014 2015 2016 2017 2018
Universal banks Super-regional banks Regional banks
Source: S&P Global Market Intelligence
Efficiency ratio (%) Efficiency ratio
• Efficiency ratios improved across each
80.0 77.21 composite, with the super-regional banks
68.82 experiencing the biggest improvement of
61.38 136 bps, followed by universal banks at
132 bps and regional banks at 93 bps.
70.0
• The efficiency ratio, which measures
59.69 the non-interest expenses relative to net
interest income and non-interest income,
60.0
66.86 helps contribute to earnings strength
58.62
when the ratio declines.
50.0
2011 2012 2013 2014 2015 2016 2017 2018
Universal banks Super-regional banks Regional banks
Source: S&P Global Market Intelligence
Credit Market Barometer | 32You can also read
