Jan 11, 2016
From the Financial Reporting View
The Office of the Comptroller of the Currency (OCC) recently issued its Semiannual Risk Perspective (Fall 2015), which discusses the key risks faced by federally chartered banks and savings institutions (collectively, financial institutions).
The OCC report notes that the financial performance of federally chartered financial institutions strengthened during the first six months of 2015 compared with the first six months of 2014. Net income rose 7% compared with the prior year period, driven by higher operating income and lower noninterest expenses. Return on equity increased in the 2015 period to nearly 10% annualized. Loan growth remained solid with larger financial institutions seeing growth primarily in commercial and industrial (C&I) loans and smaller institutions (those with total assets less than $1 billion) seeing growth largely in residential real estate and commercial real estate (CRE). However, the increases in profitability and loan balances may be mitigated by sluggish revenue growth if economic growth and interest rates remain at low levels.
The OCC report also notes that traditional credit metrics continued to improve through the first half of 2015. For example, total loans 90 days or more past due or on nonaccrual declined further, and net charge-off ratios approached pre-crisis levels. The allowance for loan and lease losses as a percentage of total loans appears to be stabilizing as the rate of improvement in credit quality performance metrics begins to flatten. At the same time, however, the OCC sees signs of increasing credit risk. Supervisory examinations and industry surveys, including the OCC’s annual underwriting survey, observed easing underwriting standards and practices in commercial lending as lenders reach for volume and yield. Loan portfolios that experienced the most easing in underwriting standards included indirect auto, credit cards, leveraged lending, C&I, asset-backed lending, and CRE. Competition was the most prevalent reason cited by examiners for relaxing pricing and terms, with economic outlook, ample market liquidity, market strategy, and risk appetite also contributing to loosened underwriting standards.
The key risk themes discussed by the OCC in the Fall 2015 report include:
- Competitive pressures, the search for revenue growth, and the ongoing low interest rate environment continue to challenge risk management and influence risk appetite.
- Strategic risk remains high for many financial institutions, as management searches for sustainable ways to generate target rates of return or struggle to implement their strategic plans.
- Operational risk is high as financial institutions adapt business models, transform technology and operating processes, and respond to increasing cyber threats.
- Compliance risk remains high as financial institutions manage Bank Secrecy Act and anti-money laundering risks, and implement changes to policies and procedures to comply with new mortgage lending requirements.
The OCC report also contains information about economic trends and conditions, banking industry financial and operating statistics, and regulatory actions.