YOY credit quality improvement continues in Q4'21

Several credit quality metrics showed year-over-year improvement for the U.S. banking industry in the fourth quarter of 2021.

Total nonperforming assets dropped 20.5% year over year to $102.26 billion in the fourth quarter, according to S&P Global Market Intelligence data. Credit trends are expected to normalize as the impact from pandemic relief efforts dissipates and labor costs increase, but credit quality finished 2021 at historically strong levels.

Quality credit continues

The ratio of nonaccrual loans to total loans and leases decreased year over year to 0.54% from 0.75% during the fourth quarter of 2021, compared with a year-over-year decrease to 0.60% from 0.74% during the preceding quarter.

Nonperforming assets as a proportion of total assets improved by 17 basis points from the same period in 2020, compared with the 2021 third-quarter improvement of 14 basis points from the corresponding period in 2020.

Restructured loans and leases as a proportion of total loans and leases also improved by 8 basis points to 0.35% year over year, compared with the previous quarter's year-over-year improvement of 4 basis points.

Strong commercial credit quality

On a quarter-over-quarter basis, commercial loan credit quality improved in almost all categories. Delinquency ratios for agriculture, commercial real estate, construction and multifamily loans all fell during the fourth quarter of 2021. Only the commercial and industrial loan delinquency ratio saw a slight uptick to 1.09% from 1.03%. On a year-on-year basis, all categories for loan delinquency ratios improved.

U.S. banks reported substantial loan growth, which was distributed across a number of categories, in the fourth quarter of 2021.

Consumer loans stay the course

For consumer loans, quarter-over-quarter delinquency ratios deteriorated for auto loans, which increased 30 basis points, and for credit card loans, which increased 9 basis points. Still, the average credit card annualized net loss rate for major issuers remained below 1% in the last months of 2021 even as consumer prices continue to soar from stubborn inflation.

However, the delinquency ratio for other consumer loans improved by 2 basis points. On a year-over-year basis, the ratio for all categories decreased.

Stabilizing quality for home mortgage loans

As of Dec. 31, 2021, delinquency trends for one- to four-family mortgage loans at U.S. banks were at 2.70%, compared with 3.36% in 2020 and 2019's 2.64%, which is the lowest rate for the category since at least 2013.

Mortgage delinquencies

Among the top 10 banks with the largest total delinquent one- to four-family mortgage loan balance for the fourth quarter of 2021, Goldman Sachs Group Inc. had the biggest year-over-year increase, at $520.0 million. Wells Fargo & Co. remains the top U.S. bank in terms of total delinquent balance for the category, at $12.82 billion.

Looking ahead

While credit quality has been pristine, the U.S. banking industry did report an uptick in provisions during the fourth quarter, and the normalization of credit could lead to more.