WASHINGTON–A new report issued by three bank regulators has identified declining credit quality trends as the result of higher interest rates on leveraged borrowers, as well as ongoing squeezes in some commercial market sectors.
According to the 2023 Shared National Credit (SNC) report published by the Office of the Comptroller of the Currency (OCC), FDIC and Federal Reserve, credit quality in portfolios of syndicated bank loans remains moderate.
But the report said there are higher levels of risk to be found in leveraged loans, as well as loans in certain industries, including technology, telecom and media, health care and pharmaceuticals, and transportation services.
Segmented Risk in Real Estate
The report added that the “…risk in the real estate and construction sector is segmented, with deteriorating trends in some sub-sectors being offset by stability and/or improvement in other sub-sectors.”
Moreover, the analysis found that loans deserving special attention are increasing, saying the percentage of loans that deserve “management’s close attention”, or “non-pass” loans comprised of SNC commitments rated “special mention” and “classified”), had increased from 7% of total commitments to 8.9% year over year.
Some Bright Spots
The report’s findings aren’t all gloomy, finding that commercial markets that were affected by the pandemic, including transportation services and entertainment/recreation, continue to show notable improvement.
There is also some lag factor involved in the findings, as it is based on an analysis of SNC loans originated on or before June 30, 2023. The agencies said the report’s findings are based on 6,589 borrowers, totaling $6.4 trillion in commitments, an increase of 8.7% from a year ago, the agencies said.
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