America’s largest banks are facing heightened scrutiny as troubling trends emerge within their loan portfolios. A recent report highlights the alarming uptick in criticized loans at three major institutions: JPMorgan Chase, Wells Fargo, and Bank of America. These developments come as the financial sector grapples with rising risks associated with lending practices, leading to concerns about potential defaults and the overall health of the banking industry.
According to data from S&P Global, criticized loans at these banks have soared, highlighting weaknesses and potential losses on their balance sheets. By the end of the third quarter of 2024, criticized loans across these banks reached an eye-watering total of $89.67 billion, marking the highest level observed since 2020. This trend reflects broader issues faced by large financial institutions as they navigate the changing economic climate.
Specifically, JPMorgan Chase experienced the most significant year-over-year increase, reporting a staggering 26.3% rise in criticized loans, leading them to total $26.01 billion. Meanwhile, Wells Fargo recorded its own considerable leap, with criticized loans rising 17.9% year-on-year to reach $37.6 billion. Not to be left out, Bank of America also reported growth of 15.2%, bringing its total criticized loans to $26.06 billion.
This worrying rise can be traced through trends seen at various banks across the industry. Data reveals public US banks' criticized loans reached $279.98 billion at the end of the third quarter, compared to $240.37 billion at the close of the previous year. Suffice it to say, the concerns over credit quality are not isolated, appearing instead as part of a larger pattern impacting many institutions.
Looking beyond just the three giants, the trend is not unique to them. Among the 100 largest public banks, criticized loans saw increases from $219.82 billion to $260.48 billion during the same timeframe. These figures collectively signal distress among institutions traditionally viewed as pillars of financial stability.
Notably, some banks recorded massive percentage hikes. Flagstar Financial, for example, reported a jaw-dropping 338.6% increase year-on-year in criticized loans, illustrating the extent of the struggles some banks are facing. First Horizon, Valley National Bancorp, and Webster Financial Corp also documented increases above 100%, with year-on-year increases of 112.2%, 110.1%, and 102.8%, respectively.
The red flags waved by these figures are enough to give nervous stakeholders pause. Analysts and investors alike have become more wary of the long-term sustainability of lending practices being employed, particularly as economic challenges loom on the horizon, including interest rate hikes and inflation pressures.
Despite these gloomy numbers, there’s been some optimism among financial experts. They assert the potential for market correction and recovery, assuming banks take measures to mitigate risks and strengthen their lending criteria. For now, cautious investors may want to keep their eyes on trending shifts, especially concerning poorly performing sectors of the economy.
Meanwhile, as financial institutions adjust their outlooks and strategic approaches, investors seeking alternative avenues for returns might look toward bank loan ETFs. These financial instruments have gained significant attention as they provide access to the bank loan market without the direct exposure associated with individual securities.
Recent insights from Eaton Vance suggest potential benefits for those investing through such strategies. Highlighting the advantages of bank loans and Collateralized Loan Obligations (CLOs), Eaton Vance points to their historically high yields. Presently, these loans offer one of the most competitive yield profiles available within fixed-income securities — levels comparable to long-run equity returns. Investors could benefit greatly from both low trading costs and high income gains if they position correctly.
Following the broader market strategies, investors are increasingly turning to actively managed products like the Eaton Vance Floating-Rate ETF (EVLN), which focuses on floating-rate bank loans. The ETF has captured significant interest recently, surpassing $1 billion in assets under management. This surge can be attributed to its potential to yield substantial returns amid rising inflation and fluctuated interest rates, particularly attractive during times when central banks are pursuing rate cuts.
Asset allocation within EVLN involves rigorous bottom-up research, providing investors with the assurance of sound lending practices intertwined with the potential for returns. This fund aims to combine both bank loans and high-yield bonds, creating diversification and stability.
The mutual fund’s performance, slated to capitalize on the current economic climate, has paved the way for continued inflows as of November 2024. Currently, the fund offers 7.56% SEC yield, contributing even more appeal for investors seeking reliable income.
While concerns grow surrounding criticized loans at major banks, the potential for turning the page remains viable. Experts encourage investors to keep watch on how financial institutions react and adapt to these troubling figures. With cautious optimism, stakeholders can navigate these waters cautiously and strategically for future growth.
Only time will tell how these rising numbers will affect the broader financial ecosystem and the operational strategies of these financial giants moving forward. Stakeholders must exercise due diligence, ensuring they're informed about changes being implemented within the banking space.
For now, the market awaits clarity from these banking leaders on mitigating risk alongside seizing opportunities as they arise.