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Criticized loans showed signs of stabilizing in the third quarter after surging in the first half of the year, with several large U.S. banks posting sequential quarterly declines.
Still, with the prospect of a permanent shift to work-from-home weighing on urban property markets, and the pandemic keeping hotel vacancies high, commercial real estate portfolios continued to be a source of upward pressure on problem assets. Moreover, even after steadying from the second quarter, criticized loan levels remain double what they were in the years preceding the pandemic, a precarious position as the current surge in infections threatens a new wave of business shutdowns.
Banks conduct formal, regular reviews of large loans, assigning them risk ratings analogous to grades given to bonds. Criticized loans range from those with weaknesses meriting special scrutiny and borrowers with shortfalls in cash flows to those that banks have classified as nonaccrual and therefore provide a broad measure of credit stress. Helped in part by special pandemic payment deferrals, narrower measures of credit performance have shown little deterioration so far. Credit loss provisions, which fell sharply in the third quarter after large reserve builds in the first half of the year, are informed in part by growth in criticized assets.
Among publicly traded U.S. banks with more than $50 billion of assets for which disclosures are available, criticized loans increased sequentially in the third quarter by a median 11%, compared with a median year-to-date increase of 119%, according to S&P Global Market Intelligence data. Publicly traded banks typically detail criticized loans in quarterly and annual filings issued in the weeks and months following initial earnings reports.
Banks posting declines
Five of the banks reported quarter-over-quarter declines ranging from 2% to 13%.
Regions Financial Corp. posted broad-based improvement that it said was led by a turnaround in the outlook for a significant portion of its borrowers in the retail sector.
In May, Regions had...