This is a rather arresting chart:
That’s from Moody’s, showing how the pace of charge-offs (write-offs on bad debt) for rated US banks now exceeds the early years of the Great Depression.
The banks incurred $45bn of loan charge-offs in the third quarter, collectively, which means they’ve racked up $116bn so far this year. That translates to an estimated annualised rate of 3.4 per cent in Q3, or 2.9 per cent year to date, Moody’s says. Annual charge-offs hit 2.25 per cent in 1932 before peaking at 3.4 per cent in 1934.
Also of interest is the chart below, showing loan loss provisions — the amount of money banks set aside for bad loans — versus the charge-offs:
So Moody’s estimates loan loss provisions were at $55bn in the third quarter, or about 120 per cent of charge-offs.
That’s a $10bn allowance for loan loss build in Q3 — down from $21bn in the first quarter, and $16bn in the second. In other words, banks are slowing their reserve build — with most justifying that decision because of the slower rate of increase in charge-offs and early signs of a deceleration in delinquencies.
The risk obviously, is that the banks are getting their forecasts for loan losses wrong, or that they are letting their loan loss reserves flatline to help boost their earnings — an accusation already levied at some European banks.
For what it’s worth, here’s what Moody’s says:
We continue to believe it’s premature for banks to lower their reserve build since problem loans and net charge-offs continue to show an upward trend even though some, but not all, consumer delinquencies showed improvement.
Related links: Banks’ coverage ratio capers, cont. - FT Alphaville Good banks, bad banks - FT Alphaville
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