The Long and Short
A closer look at NFBI lending for US banks
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Bank lending to non-bank financial institutions (NBFI) has come into focus with recent hints of weakness in global credit. Bankruptcies at Tricolor and First Brands and recent disclosures of bad loans during bank earnings seasons have triggered new concerns about rapid growth in lending to non-depositories. And while these examples of credit weakness are not necessarily the sign of a trend yet, it is worth monitoring where and to what extent domestic banks are taking on this newer form of risk.
During JPMorgan’s third quarter earnings call, CEO Jamie Dimon referred to “cockroaches” in credit, implying that a few problems typically indicates more to follow. Shortly thereafter, Zions Bancorporation (ZION) took a $49 million provision for credit losses against $56 million in net charge-offs for the quarter. The bank had previously filed an 8-K ahead of earnings stating that the bank set aside $60 million to charge-off $50 million—reserving the remaining $10 million—related to two California-based C&I loans.The bank argued the loans, underwritten by its wholly-owned subsidiary California Bank & Trust in San Diego, involved fraud. Western Alliance Bancorp (WAL) disclosed lending to the same allegedly fraudulent borrowers as well. While ZION management stated that they have no additional exposure to these specific borrowers, the incident drew a lot of attention, particularly with the spring 2023 regional bank crisis relatively fresh in investors’ minds.
In the last year alone, US commercial banks have seen a nearly 46% increase in lending to NFBI through their domestic banking operations. These loans now comprise approximately 6% of total assets on the domestic balance sheets.
As is often the case, the US money center banks have been leading the charge in NBFI lending over the past several years relative to their smaller regional counterparts. This is clear from the 1-, 3- and 5-year growth rates through June for NBFI lending at the six biggest US banks as well as the current NBFI loan balance relative to total assets (Exhibit 1). It is worth highlighting that the statistics presented below only capture lending from each bank’s domestic offices and not the total of the consolidated bank. Nevertheless, the growth rates demonstrate the extraordinary emphasis on this area of lending for the largest institutions in the US, in particular for Bank of America (BAC) and JP Morgan Chase’s (JPM) domestic offices as a proxy for global operations.
Exhibit 1: NBFI lending at the Big Six money center banks
Source: Santander US Capital Markets LLC, S&P Capital IQ, Bank Call Reports – Domestic Lending Only
Domestic banks with $50 billion or more assets have also grown NBFI lending (Exhibit 2). Excluded from this graphic are the domestic branches of Yankee Banks that would otherwise fall into that category, as they do not provide regulatory call reports that disclose these details of their loan portfolios comparable to the domestic counterparts included. The regional banks that exhibit extraordinary 1-year gains can often be the result of banks that reclassified these NBFI loans from another loan category, specifically “loans – other” on their respective call reports. Also worth highlighting is that increasing exposure to NBFI lending is not on its own an indication of heightened credit risk or a signal of higher delinquencies or loans past due in that particular lending category. The studies are instead designed to demonstrate the shifting dynamics in lending across a broad cross-section of the largest domestic lenders.
Exhibit 2: NBFI lending for domestic banks with $50 billion or more in assets
Source: Santander US Capital Markets LLC, S&P Capital IQ, Bank Call Reports – Domestic Lending Only
* Flagstar Bank was acquired and re-chartered during the study period
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