A trucking industry slump caused credit quality deterioration at several US banks during the third quarter and the failure of another this month.
Concerns around credit quality normalization and deterioration have largely centered around commercial real estate, specifically office, but another sector is coming under increased pressure: trucking. After a pandemic-era boom, trucking firms are struggling to turn a profit and in some cases, such as that of Yellow Corp. and Convoy Inc., shutting down amid declining demand, rising costs and stagnant freight rates, industry analysts said in interviews with S&P Global Market Intelligence.
As a result, several banks saw deteriorating asset quality metrics in their trucking portfolios in the third quarter. In the most dramatic example of trucking industry struggles for banks, Sac City, Iowa-based Citizens Bank failed due to losses related to the sector. Some bankers are not bullish on a near-term trucking industry bounce back.
"Things will have to get worse in trucking before they get better," Triumph Financial Inc. founder, Vice Chairman, President and CEO Aaron Graft wrote in a letter to shareholders in October. "I also believe that the leaks in the dam of commercial real estate are getting worse than people generally acknowledge, which could influence the economy and thus have an impact on freight."
Q3 trucking credit quality cracks
Triumph's nonperforming loans to total loans ratio ticked up to 1.22% in the third quarter from 0.74% in the linked quarter.
"The quarter continued to present a challenging freight environment, one which we do not yet see improving," said Luke Wyse, head of investor relations at Triumph, during the company's third-quarter earnings presentation.
Graft is bearish on freight in the short term because private equity and venture capital firms have "artificially propped up" disruptive technology companies in the industry without achieving profitability, Graft said. The executive specifically pointed to freight client Convoy, which shuttered in October after the company failed to find a buyer, saying several more freight brokers and carriers could face a similar fate.
"A significant amount of money will exit the stage in the freight industry and may not return anytime soon," Graft said. "Companies that are not profitable will eventually fail."
Even with a bearish outlook, the company will continue to serve the industry, while also remaining "vigilant in protecting our own balance sheet," Graft said.
Triumph's earnings will face continued pressure due to the current freight recession since the company is unique in that it primarily serves the US for-hire trucking industry, Piper Sandler analyst Frank Schiraldi wrote in an Oct. 9 note.
"Our enthusiasm is somewhat curbed as we continue to believe the trucking market will remain challenged in the near term," Raymond James analysts Joseph Yanchunis and Michael Rose wrote in a note on Triumph.
Unlike Triumph, some executives were more bullish on the trucking sector's eventual improvement.
Columbia Banking System Inc. experienced elevated charge-offs in the trucking portfolio of its subsidiary, Financial Pacific Leasing Inc., with the subsidiary's net charge-off to average loan ratio sitting at 5.15% in the third quarter, compared to just 0.25% for Columbia overall, according to the company's investor presentation.
However, Columbia is optimistic about the sector, expecting charge-offs in the FinPac business to gradually decline over the next few quarters.
"It's going to be a slow reduction over time, over multiple quarters to my best estimation," Chief Credit Officer Frank Namdar said during the company's third-quarter earnings presentation..
Similarly, United Community Banks Inc.'s subsidiary Navitas Credit Corp. had increased charge-offs in the quarter due to higher losses in its long-haul trucking segment, United Community Chairman and CEO Herbert Harton said during the company's third-quarter earnings presentation. The unit's net charge-off rate for the quarter was 1.62%, compared to just 88 basis points excluding long-haul trucking.
Like Columbia, United Community expects the portfolio's credit quality to improve soon.
"We think definitely next quarter will be similar to this quarter, but then thinking it will begin to subside early next year," Chief Risk Officer Robert Edwards said during the call. "The rest of the business outside of that long-haul trucking aspect of it seems to be performing so far within our expectations."
In another example of deteriorating credit quality related to the trucking sector, approximately 21% of SmartFinancial Inc.'s total delinquent and nonaccrual loans were from trucking industry clients at its equipment finance subsidiary, Chief Credit Officer Rhett Jordan said during the company's third-quarter earnings presentation.
Trucking industry woes
Banks are starting to see trucking lending cracks as the industry grapples with a variety of struggles.
The trucking industry currently has too much equipment chasing too little freight, causing profitability and freight rates to stagnate, ACT Research President and Senior Analyst Kenny Vieth said in an interview with Market Intelligence. Trucking industry freight volume is in a trough after a peak in 2020 and 2021, Vieth said.
Rising operational costs are another problem for the industry. Diesel prices are expected to remain above $4 per gallon through 2024, according to S&P Global Market Intelligence data. Furthermore, many firms bought vehicles during the recent semiconductor shortage, which caused a drastic spike in used equipment prices, Vieth said.
"Everybody and their brother was borrowing or spending historically outrageous sums of money to buy used trucks and so that capacity came in at a very high kind of per-mile cost," Vieth said.
Rising Federal Reserve interest rates have made financing equipment even more costly. As a result, some companies are unable to service their debt from equipment financing costs as the industry has slowed and their profit margins have fallen, said Dean Croke, a principal analyst at DAT Freight and Analytics.
"It's a real rollercoaster ride for carriers," Croke said. "This is kind of this whiplash effect from the record high rates in 2021."
