Academic journal article ABA Banking Journal

Asset Quality, Still Pristine

Academic journal article ABA Banking Journal

Asset Quality, Still Pristine

Article excerpt

Asset quality for the major exchange-traded banks and thrifts held steady in the second-quarter of 2006. The trend is good to see as many have predicted a worsening in the face of rising short-term interest rates and the slowing housing market.

The levels of nonperforming assets dropped on an average basis and increased on a median basis compared to the prior quarter. This could be an indicator that there may be trouble brewing in the future. When compared to the year ago period the indicators are positive with both the averages and medians well below the second quarter numbers.

Chargeoff activity increased in the quarter, which was largely just a digestion of the nonperforming assets of the prior quarter. On a year-to-year basis the ratio of net chargeoffs to average loans was up when compared to the average, but down compared to the median, leaving us to declare it a wash. Companies are still operating in a time of pristine credit quality as this ratio has tracked in the mid-20 basis point range over the last five years compared to 13 basis points for the second quarter.

Provisioning for bad loans, as measured by provisions to average loans, was up compared to the prior period, but down compared to the year-ago period. In general, banks are provisioning on a steady basis as one would expect. A material increase or decrease in this metric would be an indicator of a change in asset quality expectations.

Reserve levels also held steady in the 1.10%-of-loans range across all the prior periods, though the trend is slightly downward. This historical run rate for this metric is in the 1.20% range, so we may see companies start to build reserves if we see a swing in asset quality back to historical levels. …

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