1Q 2020 Credit Trends in Commercial Lending

AFS and RMA recently presented the latest installment of the Risk Analysis Service (RAS). Two experts from AFS, Tom Cronin and Jeremy Chalson, presented “1Q 2020 Credit Trends in Commercial Lending,” with fresh insights based on a database of over 710,000 loans across C&I and CRED product categories. As the database includes data as of March 31, 2020, it provided a few early indications of stress.

Total C&I loan balances surged during the end of the first quarter, as borrowers drew down on lines of credit in order to stockpile cash and brace for disruptions in cash flow. CRE loan balances continued to expand at a healthy pace.

Regarding loan performance, short-term C&I delinquencies (30-89 days past due) spiked during the first quarter, rising to the highest level seen since the end of the last recession. The percentage of CRE loans past due 30-89 days (but still accruing interest) more than tripled over the last four quarters.

Cronin also addressed credit quality, stating that the percentage of C&I loans risk rated criticized trended upwards during the quarter. The median vacancy rate for hotel properties nearly doubled quarter over quarter in March.

Even before COVID-19 shocked the economy, the energy sector was under supply and demand stress. As a special report for this quarter, Chalson provided an update on the energy sector. Since the RAS database goes back to 2003, before the last great recession, the volatility of the industry can be seen over time. The recent production disputes between the Saudis and Russians have pushed prices down at the same time global demand has fallen due to the COVID-19 pandemic. April 2020 marked the first time that crude futures traded at a negative price. Global demand for oil remains low as COVID-19 has reduced consumption of oil. On the supply side, Russia and Saudi Arabia were in a price war in March.

It remains to be seen whether the current collapse in oil prices will be more damaging than the 2014-2016 crash. However, Chalson pointed out three main reasons for the likelihood of this happening. The previous crisis was a supply-side shock only, whereas the current situation is complicated by simultaneous demand- and supply-side shocks. Junior debt that absorbed losses during the 2014-2016 collapse is mostly gone. And finally, COVID-19 is likely to have long-lasting impacts on the demand for oil.

The next installment of Credit Trends from the Risk Analysis Service will be broadcast in August and is sure to have even more insights based on how COVID-19 is affecting borrowers across industries and geographies.

A recording of the 1Q 2020 Credit Trends webinar is available for download here.