Losses on Syndicated Bank Loans Skyrocket

"Shared national credits" are syndicated loans and commitments of at least $20 million held jointly by several banks. Their performance offers a picture of the credit landscape, indicating how large loans to manufacturers, industrial concerns, real estate firms and a range of other companies are holding up.

Not well, according to an annual report on these loans released today by banking regulators. Losses on SNCs have reached a record $53 billion. That tops the combined loss over the last eight years and is nearly triple the previous high recorded in 2002. Assets defined as substandard, doubtful or a loss hit $447 billion, up from $163 billion in the 2008 review, with leveraged finance loans faring particularly poorly. Bad loans are also getting worse.

It's important to understand how widely these loans, and therefore their losses, are distributed across not only the U.S., but also the global economy. In theory, that should diversify risk. But the scale of the decline means there's plenty of pain to go around.

U.S. banking companies hold roughly 41 percent of SNCs, foreign banks have 38 percent and non-banks are on the hook for 21 percent. Of this last group, media and telecom companies face the greatest potential losses, followed by finance, insurance, real estate and construction firms. Overall, nonbanks hold 47 percent of SNCs rated as "classified" (substandard doubtful, loss) and 52 percent of loans and leases that haven't accrued interest for at least 90 days (and which usually end up as losses).

Souring syndicated loans are starting to seriously wound bank earnings. Cleveland regional bank Fifth Third earlier this month blamed the performance of its SNC portfolio in forecasting a sharp rise in third-quarter losses. In a second-quarter conference call, executives with First Commonwealth Financial noted that loans in its SNC portfolio accounted for nearly three-quarters of the Pennsylvania banking company's nonperforming loans.

Expect more banks to report SNC-related losses as credit continues to deteriorate.