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Tuesday, February 21, 2012

Positive Outlook for Asset Quality

The Federal Reserve’s January Senior Loan Officer Survey included a special set of questions regarding the outlook for delinquencies and charge-offs in the coming year. The survey asked for banker’s outlook, assuming that economic activity progresses as forecast. Overall between 15% to 60% of domestic banks, on net, expect improving delinquency and charge-off rates in 2012. Although expectations for improvement are less widespread than they were last year, last year’s expectations were the highest in the history of responses.

On net, about 20% of bankers expect improvement in credit card and other consumer loan quality. This indicator is the least widely expected to improve, likely because consumer loan quality has increased significantly recently.

The most marked improvement expected in loan quality is for non-traditional real estate, with a net 55% of bankers anticipating declining delinquencies and charge-offs in 2012. This compares to about 20% predicting improvement in 2011. Expectations for prime residential real estate loans remain near last year’s level with a net 33% of respondents expecting improvement.

Business loans are expected to improve as well, with a net 50% of domestic respondents expecting improvements in C&I asset quality for large, medium and small firms. Additionally, nearly 60% of respondents expect improvement in CRE this year. In contrast, foreign respondents, on net, anticipate no improvement in C&I loans, while 25% expect improvement in CRE loans.

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