Bank industry data providing more details on trends through the end of the 3rd quarter supported earlier findings of an industry overwhelmingly in a defensive posture as uncertainties secondary to monetary tightening play out. Markets reacted to a 30-year Treasury auction which went poorly before Moody’s downgraded their outlook on U.S. debt.
The Federal Reserve Senior Loan Officer Opinion Survey (SLOOS) for October (November 6) found tightened lending standards and weakened loan demand broadly prevalent across commercial and retail segments. The report summarized that “the October SLOOS asked about banks’ reasons for changing standards or terms for loans across all loan categories most frequently cited reasons for tightening standards, reported by major net shares of banks, were a less favorable or more uncertain economic outlook; a reduced tolerance for risk; a deterioration in the credit quality of loans; concerns about funding costs; a deterioration of customer collateral values; concerns about the adverse effects of legislative changes, supervisory actions, or changes in accounting standards; concerns about deposit outflows; and a deterioration in or desire to improve their liquidity positions.” Non-large banks, “more frequently cited concerns about deposit outflows, funding costs, deterioration in or desire to improve their liquidity positions, and concerns about declines in the market value of fixed-income assets as reasons for tightening lending standards.”
Of particular interest to me are details regarding commercial real estate given the ongoing headlines of imminent doom in the sector. The nearby chart shows a nearly 8-year trend of tightening CRE lending standards. Easing standards only occurred post lockdown which I view as more normalization to earlier pre-pandemic standards.
This coincides with the December 2015 regulatory focus that put banks on notice that ”supervisors from the banking agencies will continue to pay special attention to potential risks associated with CRE lending. When conducting examinations that include a review of CRE lending activities, the agencies will focus on financial institutions’ implementation of the prudent principles in the Concentration Guidance as well as other applicable guidance relative to identifying, measuring, monitoring, and managing concentration risk in CRE lending activities.” Bank investors should have greater confidence that this long period of regulatory focus and tightened lending standards will continue to benefit credit quality over the next several years.
Also last week, the New York Fed released their quarterly report on Household Debt and Credit (November 7). I include the chart on early delinquencies in which we see the ongoing rise in credit card and auto loans that are 30+ days delinquent for signs of tangible consumer stress. Other consumer loan types remain below recent historical levels although home equity is showing a significant relative uptick. To me the data reinforces the picture of 2 consumers: those who rent and those who own their home. Home owners generally have been in a much better position to manage inflationary impacts on other parts of their budget while renters have had to absorb greater increases in owner equivalent housing prices leading to increasing credit deterioration. Finally, the weak 30-year Treasury auction and Moody’s outlook downgrade bring into sharp relief the urgent need for federal fiscal discipline. The nearby chart shows total spending remains at pandemic stimulus levels. Despite record revenue gaping deficits persists greatly adding to economic risks.