The asset quality of syndicated loans has stopped improving and underwriting standards have diminished to the point where regulators are beginning to worry. An inter-agency annual review by the Fed, the FDIC and the OCC examined Shared National Credit Portfolio loans – large complex C&I and similar facilities – held by more than one institution, which altogether total $3 trillion this year, or 20 percent of US GDP.
According to Fitch Ratings, the deterioration is “further evidence that competition among lenders is heightening risks in and outside the banking system.”
The inter-agency report says that 34 percent of recently originated leverage loans had weak underwriting due to a combination of high leverage and absence of covenants. This will likely cause C&I loan loss rates to increase over coming quarters.
High-risk loan volume grew 2.4 percent over 2012’s figure, putting it at double the pre-crisis level of risky loans outstanding. Lender portfolio improvement is decelerating also. The volume of high-risk loans was 60 basis points lower than in 2012, compared with the entire market. It had dropped 2.1 percent in the year-earlier period.
The C&I loss rate for the second quarter of 2013 was 33 bps, while the 100 quarter average stands at 93 meaning, as Fitch puts it, “there will be mean reversion going forward,” despite the growing activity of nonbank investors in the leveraged loan markets.