A STUDY OF NON-PERFORMING LOANS OF BANK OF AMERICA

 

(Non-performing loan (NPL) 2022) A Non-performing loan is a loan in which the borrower has defaulted the monthly principal and interest payments for a specific period. This happens when the borrower does not have enough money to make repayments or gets into a situation which makes it difficult for them to continue with the repayment towards the loan. Generally, loans are classified as non-performing loans when more than 90 days have been passed with borrower not paying the agreed interest or instalments. However, when the borrower starts repaying the loan that has been classified as non-performing loan, non-performing loans become a re-performing loans.

Why are Non-performing loans (NPL) a problem for the bank?

They impact the banks in the following ways (Bank, What are non-performing loans (npls)? 2021):

·         NPL curtail the profitability of banks because they generate losses which reduces the bank’s earnings from their credit business.

·         To prepare for these losses, banks need to set aside money to cover the losses they expect to incur by creating provisions. This shall result in less money available with the banks to provide new loans. This reduces the earning potential of bank and weakens their condition.

 

Now, let us have a close look at the Non-Performing loans of Bank of America from 2020-2022.

(Annual reports & proxy statements 2022)

Based on the above graph, it is understood that non-Performing loan of the bank declined by 8% in 2021 and by 15% in 2022.

 

Below mentioned are non-Performing loans and Total loans and leases of Bank of America for period 2020-2022.

	2020 (in millions)	2021 (in millions)	2022 (in millions)
Total Loans and leases	982467	920401	1,016,782
Non-Performing loans	5116	4697	3,978

(Annual reports & proxy statements 2022) 

Non-Performing loans expressed as a percentage of Total loans and advances is called as Non-Performing Loan ratio. This ratio helps to measure the bank’s health and efficiency by identifying the problems with the asset quality in the loan portfolio. From the above table, we can understand that NPL ratio of the bank in 2020 was 0.52% which signify that outstanding loans present a low risk to the bank. This was the time when the world was hit by pandemic and government had introduced restrictions to contain the spread of virus. However, by 2021 the Government eased the restrictions and economy was opened. This resulted in increased business openings and consumer spending. In addition to that government announced several economic package to support the individuals and businesses who has been impacted. As a result, the non-performing loan ratio of the bank declined compared to 2020. By 2022, though economy was further opened, and more businesses started to function, there was uncertainty regarding the economic impact caused by Russia/Ukraine conflict. However, it did not negatively impact the NPL ratio of the bank and ratio declined to 0.39%.

REFERENCES

·         Bank, E.C. (2021) What are non-performing loans (npls)?, European Central Bank - Banking supervision. Available at: https://www.bankingsupervision.europa.eu/about/ssmexplained/html/npl.en.html.

 

·         NA (2022) Non-performing loan (NPL), Corporate Finance Institute. Available at: https://corporatefinanceinstitute.com/resources/commercial-lending/non-performing-loan-npl/.

 

·         NA (no date) Annual reports & proxy statements, Bank of America Corporation. Available at: https://investor.bankofamerica.com/annual-reports-and-proxy-statement.