Here’s one reason to be positive about the ongoing economic recovery: Banks are setting aside less money in expectation of future loan losses than they have since the second quarter of 2006.
According to data supplied by Standard & Poor’s Capital IQ, the nation’s 12 largest banks by assets (excluding investment and custodial banks) recorded a total of $4.75 billion in loan loss provisions last quarter. That’s down an impressive 90% from the peak of $45.8 billion in the second quarter of 2009.
Regional lenders KeyCorp (NYSE:KEY), SunTrust Banks, Inc. (NYSE:STI), and PNC Financial Services (NYSE:PNC) provide representative examples of this. KeyCorp saw its provision expense decline by 97% from its peak during the crisis, while SunTrust and PNC have notched comparable declines of 87% and 86%, respectively.
In addition to simply clearing out bad loans dating back to the financial crisis, this trend reflects the quality of loans that have been underwritten over the last five years. You can see this in the chart below, which was included in a recent presentation given by the chief financial officer of Wells Fargo & Co (NYSE:WFC).
The worst loan vintages were from 2006 and 2007 — that is, just as mortgage originators doubled down on subprime mortgages. As things progressed, however, this started to change. And by 2009, the loss rate on residential real estate loans had dropped to nearly zero.