MW Fitch flags 'contagion growth' threat as banks load up on private credit

By Steve Gelsi

Wells Fargo, Bank of America, U.S. Bancorp lead list of banks with most dollar exposure to private credit

While 10 of the largest U.S. banks have about $710 billion in exposure to private credit, which could pose a systemic threat, Fitch Ratings analysts said that financial firms can handle the rapid growth in the asset class.

"Fitch considers this exposure manageable given the banks' diversified business profiles, solid capital levels, and robust earnings profiles," Fitch analyst Julie Solar said in a Wednesday research note.

Wells Fargo & Co. $(WFC)$ has the most dollars tied up in loans and other commitments to private credit, with nearly $50 billion in exposure, followed by nearly $30 billion from $Bank of America Corp(BAC-N)$. $(BAC.SI)$ and more than $20 billion by U.S. Bancorp $(USB)$.

Truist Financial Corp. (TFC) has less than $20 billion exposure to private credit but it has 30% of its equity tied up as the bank with the largest exposure relative to its total balance sheet. (See chart below).

The 10 largest U.S. banks with the largest balances of loans to nonbanking financial institutions, such as private-equity firms, reported $158 billion in loans to private credit. They have an additional $104 billion in unused commitments.

The $262 billion combined figure represents an average of 18% in consolidated equity.

Total loans by all U.S. banks to nonbank financial institutions were $1.1 trillion at the end of 2024, or about 9% of total loan balances. The 10 banks with the largest exposures held $710 billion of nonbank financial loans, or 68% of industry balances.

Fitch analysts warned that private-credit growth raises contagion concerns, as the asset class becomes more entwined with traditional, more highly regulated loans.

Invested capital in private credit has increased at an annual rate of about 18%, while traditional commercial and industrial loan growth has increased at about 2.5% annually, Fitch said.

"This rapid growth raises concerns about the lack of transparency, limited regulatory oversight, and the potential for hidden leverage, and liquiditymismatches for certain investors or funds," Fitch analyst Solar said. "Given these concerns, regulators have increasingly focused on this sector, emphasizing its interconnectedness with the regulated banking sector andassociated financial stability risks."

For about 70% of private credit deals, the borrowing company is sponsored by a private-equity firm, according to International Monetary Fund data cited by Fitch.

"This contributes to concerns of interconnectedness and potential contagion, but also possible conflicts of interest regarding valuations, priority of claims, and the alignment of incentives," Fitch said.

At the same time, Fitch said financial stability risks from banks' direct exposure are currently limited, due to the typical structure of private credit lending, which involves closed-end funds with committed capital. These types of funds typically carry low leverage.

Private credit has become an increasingly popular asset class, with investments from insurance carriers and pension funds to drive returns. Banks have also been teaming up with private-equity firms to invest in private credit.

Also read: This opaque, lightly regulated corner of Wall Street is growing by leaps and bounds. Some worry it will eventually deliver a shock to the financial system.

-Steve Gelsi

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

February 13, 2025 10:47 ET (15:47 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.