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US bank loan loss provisioning rises modestly in Q2 as credit stays strong

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US bank loan loss provisioning rises modestly in Q2 as credit stays strong

One-off credit issues continued to pile up at U.S. banks in the second quarter, but overall credit quality remained strong by historical standards.

Across the industry, companies set aside $12.82 billion of provisions for loan losses, an increase of 6.8% from the year-ago quarter. Provisioning activity nearly matched net charge-offs with a ratio of 100.4%, and provisioning was more than $1 billion lower than the linked quarter, suggesting bankers felt comfortable about the credit environment.

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Even bankers that have faced nagging credit issues for multiple quarters said they did not see any signs of broad-based deterioration. Texas Capital Bancshares Inc. set aside $26.0 million of provisioning for loan losses in the second quarter as the bank struggled with credit issues in its energy-focused business. The bank has previously disclosed credit issues in its leveraged lending business. In the second quarter, criticized loans totaled $629.1 million, an increase of 73% from the year-ago period. But executives said on the bank's July 17 earnings call that they did not see broader deterioration, noting that leveraged loan portfolio improved in the second quarter, and there were no signs of systemic issues in energy lending.

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"I'm encouraged that we're not seeing the kind of continued follow-through on leveraged lending. I'd have a lot more concern if I was still seeing the leveraged lending not performing much better," President and CEO C. Keith Cargill said. "I really believe we're derisking the balance sheet early compared to some banks, but we've done it because we've had a couple of bad deals in these categories get our attention early."

On a linked-quarter basis, Synchrony Financial posted the largest jump in provisioning with a $340.0 million increase. However, the company posted a year-over-year decline on the line item, which management attributed to a reduction in the reserve related to its Walmart portfolio.

While provisioning industry-wide was up modestly from the year-ago quarter, it was down from the linked quarter and has been relatively stable over the last few years. And the fact that provisioning remains roughly equal to net charge-offs suggests bankers see a stable credit environment. A provision-to-net charge-off ratio of 100% means banks are neither building nor releasing aggregate reserves.

"It seems like the credit cycle continues to elongate, and with rates coming down, that could help the marginal borrower," said Julie Solar, senior director of the financial institutions group for Fitch Ratings.

Investors have sold off banks that have reported credit issues, and analysts have focused on the slip-ups during earnings calls. Cadence Bancorp.'s stock dropped 19% after its earnings release included a spike in net charge-offs driven by four credits. Executives said they see the credit issues as idiosyncratic and not indicative of systemic issues.

"Hopefully, we get more good news than bad news from here. But if we see additional deterioration, then we'll rack it up. But I think it's unusual that we have sort of this much in one quarter, and I would not expect that to be ongoing," Chairman and CEO Paul Murphy Jr. said on an earnings call.

With banks coming off years of historically strong credit quality and near-zero charge-offs, the emergence of one-off credit issues are attracting outsized attention, said Megan Fox, assistant vice president for Moody's.

"For most banks, problem loans and charge-offs and early-stage delinquencies are very slight and low," Fox said in an interview. "Because of the low absolute levels of where we are, the one-off, idiosyncratic issues are more visible in the credit metrics."

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