Delinquency rates for some commercial real estate (CRE) loans and some consumer loans have increased to above pre-pandemic levels, and banks have boosted the allowance for credit losses in anticipation of further deterioration in asset quality, according to a supervision and regulation report published Friday by the Federal Reserve.
According to the semiannual report issued by the Fed, the banking system overall remains sound, with capital and liquidity levels “above applicable regulatory requirements.” The report also asserts that bank deposit levels stabilized in the second half of 2023 and increased slightly in early 2024. Asset quality remains sound overall, according to the report.
However, the report notes that loan growth has slowed as delinquencies have increased. “Loan growth is still positive but has slowed from a rapid pace the year before,” the report states. “Both weaker loan demand and tighter lending standards contributed to the slowdown.”
The report notes that loan growth in most sectors was modest in 2023, with the “major exception” of the credit card sector, where the report states that balances increased to a historic high at the end of 2023 “despite tightened lending standards and fewer credit line increases at large banks.”
Even though overall asset quality is sound, the report states, delinquency rates are rising in CRE and some consumer sectors. The delinquency rate for consumer loans rose above 1% for the first time since the first quarter of 2020, and the delinquency rate for CRE loans increased to 0.9%, a five-year high.
“The rise in CRE delinquencies was largely due to loans secured by nonowner-occupied nonfarm nonresidential properties in banks with at least $100 billion in total assets,” the report states. (Nonowner-occupied nonfarm nonresidential properties include hotels, offices, retail stores, warehouse facilities, and other types of business property used as collateral.)
“At the large banks, office loans showed the greatest delinquency rate increase among property types, particularly in metropolitan areas,” the report added. “Reduced demand for office space and higher interest rates adversely affected office loan performance. While banks with total assets of less than $100 billion have lower CRE delinquency rates than large banks, they have a greater percentage of their total loans exposed to the CRE sector.”
On the consumer side, the report contends that the delinquency rate for consumer loans was driven higher in 2023 by the credit card and auto loan sectors. “The credit card loan delinquency rate reached 1.7% at year-end 2023, its highest level in the last five years. In addition, the share of borrowers carrying forward all or some portion of their credit card balance to the next billing cycle has increased.”
For auto loans, the report states, the delinquency rate increased in 2023 and now exceeds pre-pandemic levels. “Auto loans originated prior to the pandemic by banks with total assets over $100 billion have performed worse than newer loans, partially reflecting a tightening of lending standards for the newer loans,” according to the report.