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Large U.S. banks reported their first decline in criticized loans since the onset of the COVID-19 pandemic in the fourth quarter of 2020. The improvement provides another signal that the industry might be moving past credit concerns and toward reserve releases.
Among banks with more than $50 billion of assets for which disclosures are available, criticized loan balances declined by a median 1.6% in the 2020 fourth quarter from the linked quarter, according to S&P Global Market Intelligence data. That follows a median increase of 11.5% in the 2020 third quarter and a surge of 59.4% in the first half of 2020.
The decline in the 2020 fourth quarter was broad-based, with more than half of the banks posting drops, compared with just five in the 2020 third quarter. Overall levels of criticized loans remain elevated compared with before the pandemic, and trouble spots persist in heavily impacted commercial real estate sectors.
But the banks that have posted the biggest year-over-year increases have continued to assert that they expect actual, realized losses to be modest to minimal as the economy reopens. Since banks had set aside billions in loan loss reserves as the COVID-19 pandemic spread across the U.S., the rapid improvement in the credit outlook sets the stage...