Report: Credit Risk in Shared National Portfolio Declined in 2012

Credit quality of large loan commitments owned by domestic and foreign banks and nonbanks is on the rise for the third consecutive year, according to this year's ""Shared National Credits (SNC) Review"":http://www.fdic.gov/news/news/press/2012/pr12097a.pdf?source=govdelivery. The ""Federal Reserve"":http://www.federalreserve.gov/, ""FDIC"":http://www.fdic.gov/, and the ""Office of the Comptroller of the Currency"":http://occ.gov/ (OCC) jointly released the review Monday.

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The review revealed that total SNC commitments increased to $2.79 trillion, up 10.6 percent year-over-year. Total SNC loans outstanding also increased 11.2 percent to $1.24 trillion.

Meanwhile, the volume of criticized loans (rated special mention, substandard, doubtful, or loss), while still historically high, fell to $295 billion, an 8.1 percent drop from 2011. Criticized assets represented 10.6 percent of the shared credits portfolio, a decline from 12.7 percent in 2011.

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The improvement in credit quality is attributed to better operating performance among borrowers, debt restructurings, bankruptcy resolutions, and ongoing access to bond and equity markets.

The four largest industry groups-finance and insurance, durables manufacturing (excluding automotive), media and telecommunications, and utilities-comprised 44.5 percent of the 2012 SNC portfolio.

Of these groups, media and telecommunications accounted for 22.3 percent of criticized assets, the largest share by far. Finance and insurance followed with an 11.6 percent share of criticized assets, while utilities and real estate and construction accounted for 10.2 percent and 7.2 percent, respectively.

Distribution of credits across entities remained largely unchanged, with domestic banking organizations taking the lion's share (43.2 percent) of SNC loan commitments. Foreign banking organizations owned 36.9 percent of commitments, while nonbanks owned 19.8 percent.

Although nonbank entities-pension funds, hedge funds, insurance companies, and the like-owned the smallest share of loan commitments, they accounted for 62.4 percent of classified credits (rated substandard, doubtful, or loss).

Poorly underwritten loans originated in 2006-2007 continued to bring down the SNC portfolio. While SNC underwriting standards showed great improvement in 2011, regulators noticed an easing in standards, specifically in leveraged financed credits.