Why Citigroup’s Loan Charge-Off Rates Are More Than Double U.S. Industry Average

Charge-off rates across U.S. commercial banks fell to a low of 0.41% in 2015 due to a combination of upbeat economic conditions and a release in loan provisions from the elevated levels they were at in the wake of the economic downturn. While the figure has gradually nudged higher to 0.47% in Q3 2017, this remains below the 0.5-0.6% range they hovered around before the downturn. Going forward, we expect the normalization process to continue – stabilizing over 0.5%.

Notably, there is a sharp difference in total loan charge-off figures for the largest U.S. banks, with the figure ranging from as low as 0.3% for Wells Fargo to as high as 1.1% for Citigroup.

The figures shown above represent the total charge-off rates reported by the banks for their entire loan portfolio as a part of their Q3 2017 earnings release. The average figure for the industry is as compiled by the Federal Reserve here.

The chart below captures changes in loan charge-off rates for these banks over the last five quarters. The red-to-green shading along a row should help understand the overall trend in charge-off rates for individual banks for this period. As shown in the table, loan charge-off rates have largely remained constant around a particular level for each bank.

The weighted average charge-off rate for these banks is routinely higher than the average figure for the industry – primarily due to Citigroup’s elevated loan loss figures. While macroeconomic factors tend to affect loan charge-off rates across the industry, and the figure also swings across quarters due to seasonal factors, the sizable difference in these rates among the banks can be attributed largely to two factors:

1. Distribution of loans across loan categories: Some loan types are inherently riskier than others; for example, credit card loans (which are unsecured in nature) have the highest charge-off rates, while commercial loans (which are usually secured through collateral) have much lower charge-off rates. So a bank with a larger focus on credit card lending will witness higher overall charge-off rates.

2. Geographical distribution of a bank’s loan portfolio: Loan charge-off rates in developing countries are usually higher than those in the U.S. Hence, a bank with a larger presence outside the U.S. is expected to have elevated charge-off rates (with higher interest rates on loans more than making up for the higher loan charge-offs).

Citigroup’s loan portfolio has a higher risk profile than any of its peers because of the significantly higher proportion of credit card loans (23%, compared to an average of 10% for the other four banks), and also because nearly half of its loans are outside the U.S. On the other hand, Wells Fargo has a loan portfolio dominated by (relatively safer) mortgage and commercial loans, and it operates almost entirely in the U.S. The chart below captures Citigroup’s card loan provisions as a percentage of its outstanding card balances. As higher charge-off rates result in a bank setting aside more cash as provisions to cover these losses, we include loan provisions in our analysis as a proxy for the actual charge-off rate.

Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment/ ask questions on the comment section
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to the full Trefis analysis for U.S. Bancorp | Wells Fargo | JPMorgan | Bank of America | Citigroup

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