Profits and balance sheet developments at U.S. commercial banks in 1996 - includes related articles on consolidation of commercial banks, credit card banks

Federal Reserve Bulletin, June, 1997 by William R. Nelson, Ann L. Owen

Banks were able to keep provisioning low last year because, overall, the performance of bank loans remained quite good. Delinquency and charge-off rates for loans to businesses remained low even as the performance of loans to households deteriorated further (chart 16). Within the business loan category, the performance of commercial real estate loans has been improving dramatically (chart 17). Indeed, the net charge-off rate for these loans hovered near zero over most of last year, as banks recovered amounts similar to the amounts they charged off. Both delinquency and charge-off rates for C&I loans remained near record lows in both 1995 and 1996.

[Charts 16 & 17 ILLUSTRATION OMITTED]

By contrast, delinquency rates for loans to households have risen somewhat since 1994: Delinquency rates for credit card loans and for "other consumer loans" have reversed more than half of their declines from 1991 peaks, and the rate for residential real estate loans has reversed about one-third of its decline. Charge-off rates for credit card loans and other consumer loans also are higher, with the loss rate for credit card loans in 1996 nearly reaching the peak levels of the early 1990s. Banks that specialize in credit card lending have been particularly hurt by the rising loss rates (see box "Credit Card Banks").

Some of the disparity in the performances of household and businesses loans can be accounted for by differences in financial stress experienced by the two sectors (chart 18). For businesses, the ratio of interest payments to revenue has been relatively low in recent years, whereas for households, the ratio of interest payments and required principal payments to disposable income has risen steadily to about its elevated level at the end of the 1980s. In recent years banks have been aggressively marketing consumer credit to more-marginal borrowers. This expansion of credit to households that would not have qualified previously is probably one of the reasons household debt burden has gone up and also suggests that banks may have anticipated some of the rise in the charge-off rates on these loans.

[Chart 18 ILLUSTRATION OMITTED]

Another factor influencing delinquency and charge-off rates may have been changes in the pace of loan growth. An increase in the rate of growth of a loan portfolio generally lowers its average age. Because loans are less likely to go bad soon after they are made, a reduction in average age may temporarily lower delinquency and charge-off rates. As the loans in the portfolio mature, or "season," delinquency and charge-off rates tend to rise. The rapid growth of C&I loans in recent years may thus be depressing their delinquency and charge-off rates.

DEVELOPMENTS IN 1997

During the first quarter of 1997, bank asset growth at domestic offices continued at the robust pace posted in the preceding quarter. The value of C&I loans increased sharply, and the value of real estate loans, which had grown only slowly in 1996, expanded solidly. By contrast, the value of consumer loans on banks' books was little changed over the quarter as moderate increases in outstanding amounts on loans originated by banks were about matched by securitizations.