Bank Loan Quality Remains High, but Worries Persist

A sample of large banks in the past week reported a slowdown in mortgage originations, but an improvement in auto loan production in the third quarter and overall loan quality that one banker called “better than anticipated.”

Nonetheless, several mentioned concerns about joblessness and household financial distress that might hurt results down the road.

Banks began reporting their earnings in the second week of October, while most credit union Call Reports won’t be available until the end of the month.

For Bank of America of Charlotte, N.C., JPMorgan Chase of New York and Wells Fargo of San Francisco, mortgage originations in the three months that ended Sept. 30 were $90 billion, up 4.9% from 2019’s third quarter. The results were well below their second-quarter originations, which rose 15.1% to $92 billion.

The Mortgage Bankers Association on Sept. 18 forecast that third-quarter originations of first mortgages would rise 32% to $860 billion, following the second quarter’s 85% rise to $928 billion.

Automobile loan originations for Ally, Chase and Wells Fargo were $26.6 billion during the third quarter, up 5.1% from 2019’s third quarter. For the second quarter, auto originations plummeted 16.3% to $20.5 billion.

Credit unions don’t report auto loan originations to the NCUA, so the only metric is portfolio balances. As of June 30, credit unions held at $378.3 billion in total auto loans, up 1.7% from a year earlier.

Among all banks, the car loans stood at $485.5 billion on June 30, up 3.7%, according to the FDIC.

At Bank of America, Chase and Wells Fargo, automobile loan portfolios fell 0.4% to reach $157.9 billion in the 12 months ending Sept. 30 — an improvement from the second quarter’s 1.1% drop to $156.5 billion.

While bank reports allow an early indication of lending trends, they also provide a glimpse of concerns among the for-profit financial institutions.

In conference calls, some boasted of the strength of their results and loan quality, while also expressing concern about the economy.

The banks reported that most of those who were on loan deferments in the second quarter had left the programs by Sept. 30, and few of the post-deferment customers had missed subsequent payments.

Loan quality, whether measured by delinquency or net charge-off rates, remained low. At Ally, the net charge-off rate for all loans was 0.41% for the third quarter, down from 0.58% in the second quarter and 0.83% in 2019’s third quarter.

“Credit performance remains strong, and better than anticipated,” in part reflecting consumer resilience, Ally CFO Jennifer LaClair said Friday.

Ally’s net charge-off rates for auto loans was 0.64%, down from 0.76% in the second quarter and 1.38 % in 2019’s third quarter.

All seems well for now among credit unions, too, CUNA economist Jordan van Rijn said Wednesday. Mortgages remain strong and he said he expects auto loans to pick up in the second half of this year, and into next year. And so far, loan quality has held up.

“We haven’t really seen an increase in delinquencies or charge-offs at credit unions at all,” van Rijn said.

“One of the main factors is that credit unions are working with their members to try to help them out as much as they can with deferments and forbearances. That’s really helped folks out.”

Chase CEO Jamie Dimon said the odds of a better recovery will be raised by some form of renewed federal unemployment assistance and Paycheck Protection Program forgivable loans, combined with social distancing and other health measures to contain the pandemic.

“There are a lot of people who are under a lot of stress and strain who won’t be able to survive another year of complete closedown,” he said.

Chase CFO Jennifer Piepszak said the federal assistance was supposed to be a bridge for households and small businesses.

“Whether the bridge will be long enough and strong enough to bridge people back to employment and bridge small businesses back to normalcy … remains to be seen,” she said.

Dimon said Chase is building its reserves expecting federal relief won’t be renewed by year’s end.

The extra $600 per week in federal unemployment assistance, the Paycheck Protection Program and other pandemic relief programs added about $6,965 per person in personal income during the three months that ended June 30, according to a U.S. Bureau of Economic Analysis report released Thursday.

The assistance allowed personal income to rise 7.6% from the first quarter to the second quarter on a seasonally adjusted basis. Without the help, personal income would have fallen 4.6%, according to the BEA data.

CUNA’s van Rijn said federal pandemic relief helped keep down delinquency rates, but it’s unlikely that any additional help will be available until after the Nov. 3 election – perhaps December or January, if at all.

“The more time goes on without more stimulus money, the harder it will be for people who are out of work to pay their bills,” van Rijn said. “Maybe some people will be able to make it, but a lot won’t.”

Nationwide, MBA found 3.2 million homeowners were in forbearance plans as of Oct. 4, representing 6.8% of mortgages, down from 7.2% a week earlier.

MBA Chief Economist Mike Fratantoni said many borrowers were automatically falling off plans after hitting the six-month mark without a plan.

“Borrowers with federally backed mortgages need to contact their servicer to obtain another six months of reprieve if they are still impacted by the pandemic,” he said. “Servicers are making outreach efforts to attempt to work with these borrowers to determine the best options for them, including an extension.”