WASHINGTON — Institutions made more progress this year clearing out the worst of shared corporate loans stemming from the financial crisis, but whether they can translate that into loan expansion is still an open question.
In their annual review released Thursday of loan commitments shared by three or more lenders, regulators found 28% fewer assets deemed "criticized" than they did in 2010. Such assets, which totaled $321 billion, are now sharply down from the $642 billion designated in 2009 and also below the 2008 level of $373 billion.
Yet assets originating prior to and damaged during the financial crisis are still historically high — criticized assets were just $114 billion in 2007 — and new commitments are basically stagnant. Total "shared national" loans fell 7.6% this year to $1.1 trillion, while total commitments, which include outstanding loans and also promises to make new credit available, rose only 0.2% to just over $2.5 trillion.
The "portfolio … remained heavily influenced by significant exposure to 2006- and 2007-vintage credits with weak underwriting standards," the three federal bank regulators said in their Shared National Credits Review.
Just as lenders remain cautious about expanding consumer credit, observers said they are similarly influenced by economic uncertainty when it comes to shared commitments, although the reduction in problem assets and slight loan growth was seen as encouraging.
The report also cited the risk of SNC assets refinancing soon as a further challenge for the portfolio. (The minimum threshold for a shared national credit is $20 million.)
"I would characterize it as there is improvement, improvement that would be expected, and it's improvement that has happened in past cycles, but there is still a long way to go here. There is still a big overhang of problem credits," said David Gibbons, a managing director at Promontory Financial Group and a former deputy comptroller at the Office of the Comptroller of the Currency.
"Clearly [banks] want to work through the overhang as quickly as possible. Getting those problem asset levels down is a priority. They want to lend, and the data shows the amount of loans actually ticked up a little bit. There is lending going on. But it's fair to say that bankers are seeing the economy is not maybe as strong as they'd like. They have to be selective in their risk taking, and there are not as many opportunities to lend right now."
Criticized assets — which can mean loans considered by regulators as "substandard" or "doubtful", or those causing actual loss — were 13% of the total SNC portfolio, compared to 18% in the 2010 report. (Data for the 2011 report was taken from the Dec. 31, 2010, and March 31, 2011, call reports.)
Meanwhile, problem assets continue to be heavily skewed toward nonbanks, such as securitization pools or hedge funds. While nonbanks accounted for just 20% of SNC commitments, a majority of their credits were flagged by regulators for problems. FDIC-insured institutions owned just 17% of SNC assets designated as substandard, doubtful or causing loss.
Loans to telecommunications and the media had the largest volume of "criticized" assets, totaling $70 billion. The financial and insurance industry was next with $37 billion, followed by real estate and construction with $35 billion.
The regulators continued to warn about the effect that extensive refinancing could have on shared assets.
"Refinancing risk remains elevated as nearly $2 trillion, or 78%, of the SNC portfolio will mature by the end of 2014," the report said. "Of this amount, $204 billion is criticized."
Keith Leggett, an American Bankers Association economist, said a key concern will be whether the worst-quality commitments — particularly those tied to depressed real estate values — can even be refinanced.
"One of the key questions that you're going to run into especially in the area of commercial real estate is: Is there an equity gap — in other words the value of the property has fallen below the value of the loan? The big question is can you refinance that?"
