WASHINGTON — Judging the industry's performance in the 2010 Shared National Credits Review may turn on the old joke frequently invoked by House Financial Services Committee Chairman Barney Frank: Compared to what?

Compared to last year, the report is overwhelmingly positive, with dramatically fewer losses from syndicated credits, a steep drop in criticized assets, and some improvements that bode well for the future performance of such loans.

Historically speaking, however, the results are still poor, with criticized assets near all-time highs and continuing signs of weakness throughout the portfolio.

"There is some good news here and some news to continue to be cautious about," said Sabeth Siddique, a director at Deloitte & Touche LLP and the former assistant director of the Federal Reserve Board's credit risk sec-tion. "The good news is overall classification levels are starting to come down. However, the overall level of classification remains elevated or at historically high levels. … That is something that suggests the credit environment remains a challenging environment. We need to continue to remain relatively cautious in terms of credit quality," Siddique said.

The latest SNC report, which tracks loans of more than $20 million shared by at least three lenders, showed that losses dropped 72% to $15 billion during the year, while criticized assets — those rated special mention, substandard, doubtful, or loss — fell 30%, to $448 billion. Such assets made up nearly 18% of all shared national credits, down from 22.3% in 2009.

The report also showed a drop in classified assets — those rated substandard, doubtful or loss — of 32%, to $305 billion.

The regulators attributed the recovery to better market conditions helping improve the performance of large borrowers. Specifically, improved access to equity and bond markets helped firms to repay their loans. Some successfully restructured their debt. In a few notable cases — namely, those of U.S. automakers — companies emerged from painful bankruptcies.

"We are not out of the woods but we are in a better position than we were a year ago, and the portfolio is turning in the right direction," said Joe Evers, a deputy comptroller for large bank supervision with the Office of the Comptroller of the Currency, in an interview.

Many industry observers took the report for a sign that the economy is recovering.

"These numbers will continue to replicate the economy. If it improves, these numbers will improve," said Paul Miller managing director at FBR Capital Markets Corp.

Keith Leggett, a senior economist with the American Bankers Association, said positive factors for U.S. companies this year were nonexistent in 2009.

"We're watching a rebound in commodity prices. That's been good for commodity-based companies. In cases of finance and insurance, we've come off the extreme stress of late 2008 and early 2009," Leggett said. "These are sectors that have really shown material improvement over the last year. That's why we're seeing improvement in credit quality."

But the report noted several times that there remains continued weakness among SNC assets.

"Although credit quality improved, the volume and percentage of criticized and classified assets remain near historic highs," the report said.

The amount of criticized assets, for example, is more than five times the 2005 level, and more than 10 times the 1997 level. Loans designated as a loss were also more than five times higher than in 2005.

A particular area of concern is the large amount of loans that are already criticized and were underwritten in the build-up to the crisis in 2006 and 2007.

Those loans will start to mature in two years, and the portfolio could face additional risk from borrowers holding them attempting to refinance.

The report said 67% of criticized commitments are slated to mature between 2012 and 2014.

"Until those credits are worked out and restructured you are not going to get this portfolio back to more normal," Evers said.

But Leggett said it is unclear whether firms will be successful in their restructuring aims.

"Many of these are going to have to be rolled over. The question is, will they be able to be rolled over?" he said.

Even though troubled assets decreased, so too did the overall portfolio. The report said total SNC commitments fell 12.6%, to $2.5 trillion. Overall, outstanding SNC loans decreased 22.5%, to $1.2 trillion.

Similar to the pace of lending growth in the broader industry, observers said they expect the level of shared national credits to pick up next year.

"The degree of credit problems is still a degree of weight on the banking system and the financial system broadly but that weight is getting better daily… so it's still reasonable the banking system is going to be cautious in extending credit," said Mark Zandi, the chief economist and co-founder of Moody's Economy.com Inc. "But I expect in a year from now that quality will have improved measurably more to the point these institutions will start to extend a lot more credit."

Like in the 2009 report, nonbank entities held a significant portion of the problem credits. Nonbanks own the smallest share of the overall portfolio, about 21%, but continue to hold more classified assets than any other type of institution. Their $161 billion of classified credits — about $50 billion less than in 2009 — made up nearly 53% of such credits for the entire portfolio. Classified assets held by insured banks made up about 22.7% of all such troubled assets.

U.S. banks owned 40.8% of the total portfolio, followed by foreign banking organizations, with 37.9%.

The $94 billion of criticized credits for the media and telecommunications industry were greater than any other industry. Real estate and construction had the second most, at $60 billion, followed by finance and insurance, at $49 billion. The share of total criticized assets by those three industries was, respectively, 21%, 13.5% and 11%.

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