US banks log increased net charge-offs in several loan segments in Q2 2024

Credit quality trends declined at US banks with increased net charge-offs in several loan segments in the second quarter.

The credit card net charge-off (NCO) rate reached a multiyear high of 4.82% in the second quarter — 13 basis points up sequentially and 134 basis points up year over year, according to an S&P Global Market Intelligence analysis.

The commercial and industrial (C&I) NCO rate increased 8 basis points quarter over quarter and 17 basis points year over year to 0.48% in the second quarter.

The NCO rate for the multifamily segment was 0.09%, up 4 basis points from the previous quarter and 5 basis points from the same period a year ago.

NCOs declined in three loan segments — auto, construction and other consumer loans. The auto loan NCO rate fell 22 basis points quarter over quarter to 0.99%, which was still 15 basis points higher than in the 2023 second quarter. The NCO rate for construction loans and other consumer loans fell 1 basis point and 3 basis points, respectively.

Overall, total NCOs at US banks rose 43.1% year over year to $21.29 billion in the second quarter. NCOs as a percentage of average loans and leases was 0.68%, up 3 basis points from the first quarter and up 20 basis points higher from the same period a year ago.

Bank credit quality metrics worsen YOY

Early-stage delinquencies, or loans and leases past due between 30 days and 89 days, rose 16.7% year over year to $64.17 billion as of June 30. Loans and leases past due 90 days or more increased by 28.1% year over year to $21.95 billion.

Nonperforming assets (NPAs) as a proportion of total assets went up 18 basis points year over year, to 0.52%.

Commercial real estate NCOs surge

Commercial real estate (CRE) credit quality metrics worsened even as top lenders reduced their office portfolios in the second quarter.

Total CRE loan net charge-offs in the second quarter stood at $1.75 billion, up 45.9% from $1.20 billion in the year-ago period. CRE NCOs as a percentage of average CRE loans rose 12 basis points sequentially and 11 basis points year over year to 0.38%.

Delinquent CRE loans were up 62.8% year over year to $29.68 billion at June 30. The year-over-year increase in the CRE loan delinquency ratio was 60 basis points to 1.62%.

Among the 20 US banks with the largest CRE NCOs in the second quarter, Wells Fargo & Co. unit Wells Fargo Bank NA logged the highest balance at $271.0 million, or 1.3% of its average CRE loans. Delinquent CRE loans was 5.4% of total CRE loans.

Higher losses in Wells Fargo & Co.'s CRE office portfolio drove the company's commercial portfolio net loan charge-offs to $468 million, or 35 basis points of average commercial loans, up from $200 million, or 15 basis points, in the same period a year ago, according to a recent Form 10-Q filing.

"Commercial real estate office losses have been and will continue to be lumpy as we continue to work with clients," CFO Michael Santomassimo said during Wells Fargo's second-quarter earnings call. "We continue to actively work to derisk our office exposure, including a rigorous monitoring process."

Bank of America NA, which topped the list in the first quarter, closely followed Wells Fargo with $269.0 million in CRE NCOs in the second quarter. CRE NCOs as a proportion of average CRE loans stood at 1.8%.

"We continue to aggressively work through our loans in our modest CRE office portfolio. We saw a decrease in all the categories: a decrease in reservable criticized loans, a decrease in NPLs and a decrease in net charge-offs," Bank of America Corp. President and CEO Brian Moynihan said in the company's second-quarter earnings call. "This supports our previous expectation that net charge-offs in the second half of 2024 will be lower than the first half of 2024."

New York Community Bancorp Inc. unit Flagstar Bank NA posted the highest ratio of CRE NCOs to average CRE loans out of the 20 banks, at 9.5%, an increase of 946 basis points from the year-ago period. The bank's CRE NCOs in the second quarter amounted to $236.1 million.

The company had $932 million in CRE payoffs in the quarter, of which $714 million was from multifamily. About 48% of the payoffs were from classified loans.

"[O]ne of the strategic goals of the company is to shrink our CRE exposure, it's roughly $45 billion, and we have a long-term goal to get that into the $30 billion to $33 billion level to give us diversification on the balance sheet," Joseph Otting, president, CEO and executive chairman of New York Community Bancorp, said in the company's second-quarter earnings call.