The deterioration in energy sector loans nearly offset improvements in the performance of other industry loans, according to this year's Shared National Credit (SNC) exam. Classified loans, or those assigned a rating of substandard, doubtful or loss, in the energy sector rose by $21.1 billion. Conversely, loans in the telecommunications and cable sector, which represented the largest decline in credit quality last year, showed a slight improvement, with classified loans in the indusrties falling by $2.4 billion. In the spring, traders predicted there would be less credit deterioration (LMW, 5/26).
Total loan commitments declined by 12% compared to last year. The SNC program examined 8,232 credits in 2003 representing $1.6 trillion in commitments. This figure has decreased from the $2 trillion peak in 2001. The report indicates that this decline has been driven by lower customer demand, tighter underwriting standards, attractive capital markets alternatives and by banks exiting non-strategic business lines and less profitable customer relationships. Conversely, the total commitment held by non-banks rose to 11%. The report indicates that the total classified loans held by non-banks also rose to $43.6 billion from $41.1 billion reflecting the participation of these investors in the leveraged loan market, particularly in the distressed secondary market.
The report notes that none of the figures include the effects of hedging or other techniques that individual organizations might have employed. Commercial banks have become more active participants in the credit default swap market in response to the defaults experienced in 2001 and 2002 (8/02).