Samantha: Hello, this is Samantha Shares.
This episode covers the O C C's current thoughts on Credit Risk
This podcast is educational and is not legal advice.
We are sponsored by Credit Union Exam Solutions Incorporated, whose
team has over two hundred and forty years of National Credit Union
Administration (N C U A) experience.
We assist our clients with N C U A so they save time and money.
Credit Risk: COMMERCIAL CREDIT THEMES
Commercial credit risk remains moderate and shows signs of
stabilizing as risks are better identified, monitored, and controlled.
Elevated but declining interest rates could continue to affect borrowers
with loans that originated before 2022, especially those with variable rates,
or borrowers seeking refinancing.
Credit risk drivers indicate pockets of risk specific to a
lender's region and lending market.
The current operating environment remains challenging, especially for companies with
higher leverage and marginal repayment capacity, smaller and lower-rated firms
with near-term debt maturities, firms with a higher level of floating debt, and
firms with limited financial flexibility.
It is important that banks continue to use sound credit risk management
practices such as stress testing at both the portfolio and facility levels,
timely and accurate risk ratings, and effective concentration risk management.
The C R E office sector continues to experience stress, and there may
be additional valuation declines and bank losses as a volume of office and
multifamily loansâmany with interest-only termsâare set to mature or reprice
over the next two to three years.
C R E borrowers seeking to refinance may need to re-margin through cash
equity injections or by providing additional collateral because of higher
debt costs and lower property values.
Generally, banks are appropriately identifying problem office C R E loans,
and the O C C expects banks to continue to have credit risk management systems that
produce accurate, timely risk ratings.
Classified loan levels may increase but are expected to remain manageable.
Risks in multifamily C R E lending remain elevated,
particularly in the luxury segment.
Nationwide, pressures from higher interest rates and increased
expenses are slowing the growth in net operating income (N O I).
Oversupply in some southern, southeastern, and western metro areas and changes in
rent regulations in some markets have resulted in further narrowing of N O I.
The hotel and industrial sectors continue to show signs of softening.
While banks with C R E concentrations continue to present heightened risk,
C R E loan growth has slowed overall.
Staffing continues to be challenging in the loan workout
and credit risk review functions.
During the most recent benign credit period, retirements and
other attrition decreased the number of experienced professionals.
It remains important for banks to ensure that experienced staffing is adequate.
The allowance for credit losses (A C L) should continue to reflect
a forward-looking assessment of loan portfolio risks.
This includes considerations for potential loss drivers from a bank's
current business, economic, and overall operating environments.
The A C L should include appropriate adjustments, such as qualitative factors,
recalibration, or model redevelopment, to address potential modeling imprecision.
RETAIL CREDIT THEMES
Retail credit performance remains satisfactory, and overall
retail credit risk is stable.
In recent years, consumers benefitted from strong employment and wage growth,
but those factors are beginning to slow.
However, the labor market's rebalancing of supply and demand does not currently
indicate systemic consumer stress.
Consumer segments that are most susceptible to elevated prices are highly
leveraged, lower income borrowers, but do not present systemic credit risk.
Delinquency and loss rates on residential real estate-secured
loans held by banks remain historically low but are increasing.
Delinquencies in other retail asset classes, namely credit cards and auto
loans, reflect an increasing trend.
However, banks' retail credit loan performance is consistent with many
industry forecasts reflecting delinquency and seasonal loss patterns normalizing
from atypical historically low levels.
Portfolio growth was generally flat for the first half of 2024.
Headline nominal growth in credit card outstandings continues, largely because
of several years of high inflation.
Credit risk drivers continue to include higher interest rates on newly
originated loans with potentially higher loan-to-value ratios,
upward adjustments on variable rate loans, and borrower segments with
more limited repayment capacity.
Banks reported tighter lending standards across most categories of residential
real estate lending, and with credit card, auto, and other consumer loans
in response to economic uncertainty.
As risk profiles change, increased portfolio monitoring may be
warranted with appropriate risk allocation within the A C L.
Sound governance, transparency, and documentation of assumptions
and judgments, including those for scenario selection and weighting,
are critical to an appropriate A C L.
Homeowners face mortgage payment increases.
Home price appreciation is contributing to increased real estate taxes, and
insurance costs are increasing because of appreciating home values, rising
construction costs, and insurability issues related to climate-related events.
Affordability pressures in some geographies are more material
and may adversely affect borrowers' ability to repay debts.
The increase in housing obligations may warrant enhanced risk identification,
monitoring, and reporting.
Despite increasing costs, the median monthly payment increase in taxes and
insurance is not anticipated to have a systemic impact on retail credit.
Collateral administration policies should outline standards,
responsibilities, processes, and internal controls so banks maintain
appropriate collateral protection.
Such policies and procedures should facilitate timely identification,
remediation, and reporting of expired insurance policies and
inadequate insurance coverage.
If your Credit union could use assistance with your exam, reach out to Mark Treichel
on LinkedIn, or at mark Treichel dot com.
This is Samantha Shares and we Thank you for listening.