Improving asset quality
Commercial bankers (XLF) in the United States have seen their slippages decline over the past couple of years on substantial improvement in operating performance across the sectors. The banks with exposure to energy saw some slippages due to oil prices (USO). However, the provisions have reduced due to the rebound in oil prices. After the 2007 financial crisis, banks reduced their exposure to structured instruments. Wells Fargo (WFC) has managed to reduce its non-performing assets on an absolute basis.
In 3Q17, Wells Fargo saw its non-accrual loans fall to $8.6 billion, or 0.91% of its total loans, compared to $9.1 billion, or 0.95% of its total loans, on June 30, 2017. The decline was across consumer and commercial offerings, reflecting an industry-wide trend.
Wells Fargo is following strict underwriting guidelines for commercial as well as retail offerings, which has resulted in substantially lower provisions and foreclosures. The guidelines have also resulted in lower originations in recent quarters. Investors with a risk appetite sometimes look at banks taking a marginally higher risk and expanding their loan books.
The Trump administration is pushing for financial reforms, easing rules on lending and capital adequacy ratios. That could trigger competition among bankers to seek more exposure and thus lead to a marginal rise in slippages over a period of time. These reforms, as well as a push for lower taxes, could help bank revaluations in the short to medium term.