System Signals — Q2 2025
Signal 1: Delinquency Approaching 1% — No Sign of Stabilization
The 60+ day delinquency ratio rose to 0.91%, up 11 bps from Q1's seasonally depressed 0.80% and 6 bps above Q2 2024's 0.84%. The over-$10B cohort reached 1.25%.
Q1's seasonal curing was temporary, as expected. We read consumer lending, particularly indirect auto and credit card, as the source of the deterioration, with depressed used-vehicle values leaving borrowers in negative equity. We also read delinquent loans as migrating into late-stage buckets rather than curing.
At the current trajectory, the system-wide ratio breaches 1.00% by Q4; the over-$10B cohort is already well past that mark. The aging composition suggests the charge-off pipeline is building, and we read these loans as converting to realized losses over the next two to four quarters.
What to watch
- Pressure: Q3 delinquency test — if Q3's reading exceeds Q3 2024's 0.91%, the ratchet continues toward the 1% threshold
- Watch: NCO acceleration — charge-offs should begin accelerating as aged delinquencies resolve into realized losses
- Pressure: ACL coverage — a declining ACL / delinquent-loans ratio signals under-provisioning
Signal 2: The Funding Gap Reopens
Deposit growth slowed to 0.1% in the quarter after Q1's 3.1% seasonal surge, while loan growth accelerated to 1.66% and the loans-to-assets ratio ticked up to 70.7%.
We read Q1's deposit growth as seasonal and the underlying deposit trajectory as flat to slightly positive, not enough to fund the loan-growth pipeline. Institutions leaned back on wholesale funding in the quarter: borrowings rose 3.1%, the first increase in over a year, though they remain 27% below year-ago levels.
If deposits do not accelerate in Q3–Q4, institutions face a choice between slower loan growth, which forgoes interest income, and more wholesale funding, which raises interest expense and compresses margins. Either path weighs on earnings.
What to watch
- Watch: Q3 deposit growth — needs to exceed 1% to keep pace with lending; below that, the gap widens
- Pressure: Borrowings trajectory — the Q2 uptick is the first in over a year; sustained increases confirm the deleveraging cycle has turned
- Watch: Certificate competition — if institutions raise rates to attract deposits, the funding-cost advantage narrows
Signal 3: Margin Gains Are Decelerating
NIM reached 3.28% (annualized), the highest of the recovery and 26 bps above a year earlier, but the sequential gain narrowed to 4 bps from Q1's 15.
We read the asset-yield repricing cycle as maturing. New loan originations are pricing closer to the portfolio average, while deposit costs creep higher as older, lower-rate certificates mature and renew at current market rates. On that reading, the repricing asymmetry behind the NIM recovery is narrowing.
A slower margin gain weakens the earnings tailwind just as credit costs rise. If NIM expansion stalls entirely, which the deceleration suggests could happen within two to three quarters, provision expense alone will set the direction of ROAA.
What to watch
- Watch: NIM direction — a flat or negative sequential reading would signal the expansion is effectively over
- Pressure: Cost of funds — if accelerating, margin compression begins regardless of asset yields
- Watch: Yield convergence — new-loan yield vs. portfolio average; when these converge, the repricing benefit is exhausted
- The report names indirect auto and card lending, and late-stage buckets, as where delinquency sits; it shows no loan-category or bucket figure.
- The projections for delinquency and for the margin extend the pace of recent quarters; they are not a model's forecast.
- NIM is annualized from the year to date, so the sequential gains the report compares are not measured on one basis.