For the sixth time in the last nine quarters, the US banking industry reported a lower level of total assets.

As of June 30, total assets for US commercial banks, savings banks, and savings and loan associations were $23.887 trillion, down about $71 billion, or 0.3%, from March 31, according to regulatory data compiled by S&P Global Market Intelligence. The industry had experienced sequential asset growth of 1.2% and 1.1%, respectively, in the previous two quarters.

Most of the banking behemoths reported asset contraction or tepid asset growth during the second quarter. Of the 20 biggest banks by total assets at June 30, excluding companies with a foreign banking organization charter, only Morgan Stanley Private Bank NA had a linked-quarter asset growth rate greater than 1%. Fifteen of those 20 banks shrunk total assets, highlighted by Charles Schwab Bank SSB's 4.5% decline.

Asset transformation

As banks were in downsizing mode, they altered their asset composition to incur additional risk with higher potential payoffs.

Total loans and leases increased $125.50 billion, or 1.0%, on a quarter-over-quarter basis, bouncing back from the first quarter's 0.3% drop-off and representing the best growth rate since 1.9% in the last quarter of 2022. Much of the growth came from loans to nondepository financial institutions in domestic offices, which were up $76.12 billion. Credit card was another growth category, up $23.72 billion.

Banks cut exposure for several other loan types in domestic offices, including auto, one- to four-family construction and non-owner-occupied commercial real estate. In public company filings, many large banks reported lower outstanding balances in the office sector, while the trend was ambiguous in the retail/shopping center commercial real estate segment.

Loan growth across a smaller base meant less room for other asset categories. Following two consecutive quarterly increases, total securities were down about $17 billion, or 0.3%. In 2024, banks are increasingly relying on available-for-sale securities and moving away from held-to-maturity securities. Cash and equivalents represented another category where banks veered in a different direction, with a quarterly decrease of $166.45 billion, or 4.7%.

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Funding transformation

Banks struggled to maintain cheaper funding sources in the second quarter. All eight banks with more than $500 billion in total assets reported a decrease in nonbrokered US deposits. Citibank NA, in particular, recorded a 3.5% quarterly decline. The industry aggregate was a quarterly change of negative 1.2%. Banks also cut back on brokered US deposits, which fell 0.6%.

Borrowings filled the funding gap. On a sequential basis, borrowings across the industry were up $80.47 billion, or 4.1%, with the two largest banks — JPMorgan Chase Bank NA and Bank of America NA — accounting for more than two-thirds of the increase.

Credit deterioration

Banks continued to grapple with a heavier load of problem assets in the second quarter. The industry's ratio of nonperforming assets plus loans 90 or more days past due but still accruing interest as a percentage of total assets climbed to 0.68% at June 30, up 2 basis points from March 31 and representing a three-year high. Annualized net charge-offs (NCOs) as a percentage of average loans also was 0.68% in the second quarter, up 3 basis points sequentially and representing the highest level in 11 years.

New York Community Bancorp Inc. unit Flagstar Bank NA was an outlier, with its NCO ratio soaring 129 basis points from the first quarter to 1.68%. Commercial real estate office loans accounted for the bulk of the bank's NCOs.