U.S. Bank Loan Performance: Trends and Insights

From Charge-Offs to Opportunity: How Banks and Private Credit Together Power the U.S. Economy Bank loan portfolios represent the core of traditional lending activities that help drive economic growth. It encompasses property ownership from residential to CRE, consumer credit, business loans, and more. Below is a list of that showing loan performance for the top 100 for the past 20+ years. This list of U.S. banks by assets shows the annualized net charge-off rates as a percentage of loan par balances, which serve as a key indicator of credit quality for each segment with implications for credit worthiness of the asset class and health of overall economic. Here are some observations to consider: - Total loss rates for bank B/S loans and leases have declined over the past 2 years showing a gradual improvement from the interest rate shock that occurred in 2022-2023. - The banking system annual loss rate now stands at 66 basis points, somewhat comparable to what one might observe in the private credit markets. - Residential home loans remain the star performer within a bank lending book, a super-safe asset class from a credit perspective with a loss rate of 1 basis point, per annum. - Commercial real estate loans have a relatively low loss rate, likely because banks are working with the borrowers to extend and amend their loans, with a very large maturity wall that has materialized. Banks have lowered their exposure to CRE over the past 2 years in a meaningful way as they have become more conservative lenders, creating a void of capital needed to finance CRE. - Farmland, which is a historically volatile asset class, typically makes for a safe loan, as the LTV dettachment point is ~35% which provides a big cushion for lenders, while food inflation has pushed farmland higher in recent years. - Credit Cards are significantly riskier vs. other asset classes: leading banks report a 379 bps loss rate in the most recent quarter; however, bank issued credit cards perform materially better vs. non-bank cards. Other categories of consumer unsecured loans fit in the same risk basket, with creditworthiness tied directly to net worth, FICO score and debt-to-income ratio. Marathon is massively underweight to consumer unsecured loans. - Loans to small businesses are experiencing some stresses, however, are in line with historical averages. Middle Market sponsor-led loans have superior risk-reward parameters; however, the quality of the business and its indebtedness is the key driver to performance. - The ultimate stress test is to evaluate a bank's B/S and its loan book vs. GFC credit and liquidity conditions as shown in the data below. It’s important to evaluate quality of earnings between private credit manager and banks. Marathon Asset Management's ABL strategy has delivered an annual loss rate of well less than 10 basis points historically, on par with the highest quality bank lending metrics. Private credit lenders perfectly complement banks.