Commercial Loan Reserves Grow as Other Coffers Shrink
Since the first quarter of 2013, reserves for commercial loans have increased each quarter, even as overall reserves steadily declined at commercial banks and savings banks.
That’s according to research firm SNL Financial in Charlottesville, Va. In the second quarter, reserves for commercial loans totaled $26.90 billion, up from $26.57 billion in the first quarter and $25.20 billion in the 2013 second quarter.
The increase in reserves could represent a move deeper into the risk pool as competition for commercial and investment loans heats up, SNL Financial noted.
For commercial banks and savings banks with total assets of $1 billion or more, reserve coverage for commercial loans represented 1.11% of all loans in the second quarter.
Meanwhile, reserves for real estate loans, which includes commercial and residential real estate as well as construction loans, have fallen dramatically over the past year, helping guide down aggregate reserves across loan types, according to SNL Financial.
For the second quarter, reserves for real estate loans totaled $51.34 billion, down from $54.29 billion in the first quarter and $68.60 billion in the year-ago quarter.
Some banks are willing to take on more risk as the competition for loans continues, said Steven Reider, president of Bancography, a banking consulting firm in Birmingham, Ala.
The decline in aggregate reserves across loan types while they rise for commercial loans fits a general theme of increased competition in the sector, he added.
For credit unions, charge-offs have stayed well below those of banks, according to Larry Middleman, president/CEO of CU Business Group LLC, a Portland, Ore.-based business lending and services CUSO.
They stayed below the 1% charge-off rate for business loans, meaning less than 1% of total business loan balances, he explained.
However, commercial bank charge-off rates went as high as 2.45% in 2009, Middleman noted. Overall, commercial loan dollars at banks dropped 10% between 2008 and 2011, and have now recovered to 2008 figures.