What Were Total Loan Charge-off Rates For The Largest U.S. Banks In Q3 2016?
Loan charge-off rates for the five largest U.S. banks ranged from a low of 0.34% for Wells Fargo to almost 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 quarterly 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.
Notably, 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 macro-economic factors tend to affect loan charge-off rates across the industry, the difference in these rates among banks can be attributed 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. Accordingly, a geographically diversified bank like Citigroup generally reports much higher loan charge-off rates compared to banks like Wells Fargo, which is focused almost entirely in the U.S.
That said, charge-off rates for all U.S. banks have been unusually low over the last two years thanks to stronger economic conditions – recovering considerably from peak levels seen immediately after the 2008 recession. To put things in perspective, overall loan charge-off rates for U.S. banks were greater than 3% in 2009, but have hovered around 0.45% since mid-2014. However, there has been a slight but discernible increase in charge-off rates since Q3 2015 – something we attribute to a normalization in charge-off rates for the U.S. banking industry. We believe that charge-off rates are likely to increase over subsequent quarters before they settle down around their historically stable level between 0.5-0.6%.
The chart below captures JPMorgan’s commercial loan provisions as a percentage of its portfolio of commercial & industrial loans. 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.
See the links below for more information about the 5 largest U.S. commercial banks:
- How Much Of Total U.S. Deposits Are Held By The Country’s Five Largest Banks?
- How Much Of Total Outstanding Loans In The U.S. Were Handed Out By The Five Largest Banks?
- What Was The Loan-To-Deposit Ratio For The Largest U.S. Banks In Q3 2016?
- What Is The Breakup Of Outstanding Loans Across The U.S. Banking Industry By Loan Type?
- What Was The Distribution Of Loans Across Categories For The Largest U.S. Banks In Q3 2016?
- How Have Net Interest Margins For The Largest U.S. Banks Trended Over Recent Quarters?
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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