Commercial and industrial loans, another important category of loans and a source of profitability for banks, saw its delinquency rate move higher in the fourth quarter of 2008. Investors who are brave enough to wade into banks as an investment should watch this category further, as it will likely move higher as we continue through the credit cycle.

The Federal Deposit Insurance Corporation (FDIC) reported in its quarterly banking profile for the period ending December 31 that total commercial and industrial loans were $1.496 trillion, approximately 19.3% of net loans and leases.

IN PICTURES: Learn To Invest In 10 Steps

High Non-Current Loan Percentages
The FDIC also reported that 1.69% of all commercial and industrial loans were non-current, which the government defines as loans past due 90 days or in non-accrual status. Another 0.96% were 30-89 days past due. While this percent is nowhere near some other categories like construction and land development, where 8.51% of loans are non-current, it is a source of worry as non-current commercial and industrial loans were only at 0.89% just six months earlier. As can be seen in the graph below, the non-current rate peaked at just over 3% for larger banks in the last cycle. (To learn more about the FDIC and where it came from, read The History Of The FDIC.)

(Source: FDIC)

Let's Look Closer At Five Banks
(NYSE:CMA) is a regional bank headquartered in Texas with $67 billion in assets. The bank had 46% of its loans in the commercial and industrial category at the end of 2008. Dale Green, chief credit officer at Comerica, said during the Q4 conference call that default rates for these types of loans may peak higher than during previous cycles.

"They may be a bit higher than they've been in prior cycles simply because of the magnitude of what's going on," Green said.

A bank with one of the highest proportions of commercial and industrial loans is SVB Financial Group (Nasdaq:SIVB) with 73%. The bank is headquartered in the middle of Silicon Valley in California. It has managed the cycle well so far and reported non-performing loans as a percentage of total gross loans at 1.57% at the end of 2008.

UMB Financial (Nasdaq:UMBF) is headquartered in Kansas City, Mo. and has 45% of its loan portfolio categorized as commercial and industrial. The bank only had 0.2% of its total loans classified as non-performing, and it should have no trouble absorbing an uptick in commercial and industrial loans due to its high capital ratios.

Cullen/Frost Bankers (NYSE:CFR) has 43% of its loans as commercial and industrial, and it also has a fairly low 0.88% of total loans classified as non-performing at the end of 2008. The one worry on Cullen/Frost is its lending to energy companies since it is located in Texas. The company had $855 million in outstanding loans to energy companies at the end of 2008.

Although BOK Financial (Nasdaq:BOKF) has 42% of its loans as commercial and industrial, the bank felt strong enough to turn down government bailout money last fall. The bank did report deteriorating asset quality at the end of 2008, with non-performing assets totaling $343 million, or 2.65% of total loans, although commercial and industrial non-performing loans were lower at 1.82%.

Higher Default Rate Is Likely Going Forward
It is likely that the banking industry, still reeling from the bursting of the real estate cycle, will see a higher default rate on commercial and industrial loans. This is something the industry doesn't need given the problems with asset quality and public confidence in our financial system.

For further reading on how these problems began, check out our related article, The 2007-08 Financial Crisis In Review.

Filed Under:
Tickers in this Article: CMA, BOKF, CFR, UMBF, SIVB

comments powered by Disqus

Trading Center