Credit quality continued to improve for the U.S. banking industry in the second quarter as stimulus payments and a recovering economy drove down delinquencies across nearly all loan types.
The most notable change was in early-stage delinquencies, or loans between 30 and 89 days past due, with an improvement of 11 basis points to 0.35% of total loans and leases. Nonaccrual loans declined by $2.91 billion across the industry, an improvement of 3 bps to 0.66% of total loans and leases. Nonperforming assets also decreased by $6.49 billion, a decrease of 8 bps to 0.52% of total assets. Robust credit quality aided the banking sector's bottom-line profitability in the quarter, due to negative provisioning that boosted EPS.
On a year-over-year basis, consumer loan credit quality improved significantly. Credit card loans led the pack, with a decline of more than 80 bps in the delinquency ratio to 1.54% from 2.35%. Net charge-offs for major U.S. issuers fell to their lowest levels in more than a decade as consumers continued to pay down debt. Ratios for delinquent auto loans also improved. Other consumer loans, which includes everything from boat loans to debt consolidation, was the only category that saw a slight increase in delinquencies, reaching 1.42% compared with 1.38% a year ago.
Leveraged loan default rates have also reached their lowest level since April 2012, falling to 0.58% in July, according to the S&P/LSTA Leveraged Loan Index. Due to the Federal Reserve's pandemic-related measures, the transition from a default cycle to a benign credit cycle happened faster. After peaking above 4%, the default rate fell below 1% in just 10 months, compared to the 17 months it took to fall below 1% during the 2008 financial crisis.
For commercial loans, the second quarter saw farm loans perform significantly better than in the prior-year period. The delinquency ratio for the category fell to 1.79% from 2.60%. Commercial real estate remained mostly flat year over year but improved from the first quarter. Both commercial-and-industrial and construction loan delinquency ratios also fell year over year.
While there was a slight year-over-year increase in the delinquency rate for one- to four-family mortgage loans — from 2.82% to 2.85% — it was still at a historically low level. During the second quarter, delinquencies in almost all categories of home equity lines, junior liens and first-lien one- to four-family loans decreased compared with the second quarter of 2020. One exception was nonaccruals for first-liens, which increased by $3.44 billion.
Among the top 10 banks by total delinquent one- to four-family mortgage loans for the quarter, Wells Fargo & Co. had the highest balance, but the megabank reported the largest year-over-year decrease in volume of delinquent loans. In addition, the bank's overall delinquency ratio was still relatively low at 4.6%.
Wells Fargo CFO Mike Santomassimo said during the company's earnings call that elevated prepayments drove a decline in the bank's overall residential loan balance. M&T Bank Corp. CFO Darren King reported a similar pattern. "Residential real estate loans declined by 2%. We've seen little opportunity for additional buyouts of loans from Ginnie Mae servicing pools, as delinquency and payment trends continue to improve," King said during the bank's earnings call.
Goldman Sachs Group Inc., on the other hand, expects to see loan growth pick up pace in a benign credit environment. Residential real estate warehouse lending and wealth management drove the bank's total loan portfolio up during the quarter, according to CFO Stephen Scherr. At 11.7%, Goldman reported the second-highest delinquency rate for one- to four-family mortgage loans among the top 10 banks by delinquent balances.
