Senior Loan Officer Survey – Pushing on a string

The Federal Reserve’s Senior Loan Officer (SLO) Opinion Survey is released quarterly and offers investors valuable insight to 72 domestic banks and 20 U.S. branches and agencies of foreign banks on topics of current interest. So, what did the latest April report indicate? 

Commercial and consumer loan demand was weaker in the first quarter even though underwriting standards were basically unchanged. Driving the slowdown were credit card and auto lending.  The credit card category stood out as banks tried to reverse a decline in credit card spending by making it easier for consumers to borrow during the last quarter.  So far, easier credit has not increased borrowing. 

Credit card lending growth is now running at the lowest level of the last five years.  The independent card companies (i.e Capital One Financial, Discover Financial, and Synchrony Financial) are most exposed. Starting in early 2016, banks started tightening underwriting standards for car loans.  This continued over the last quarter and has resulted in slower loan growth. Some regional banks are generally more exposed to auto lending and are worth paying close attention to. 

Underwriting standards in other areas such as commercial real estate (“CRE”) were tightened, especially on construction and land development and multi-family loans due to increasing uncertainty on market prices, vacancy rates and other fundamentals drivers.  CRE continues to draw regulatory scrutiny as a legacy of financial crisis. 

Much like the reported slowdown in commercial and industrial lending reported in the first part of the year, the SLO report showed that loan demand generally softened over the last quarter.  Our current outlook for the second half of 2017 is for loan growth to pick up a bit, but still be less than the market consensus.  We expect tighter lending standards will drive asset quality deterioration in CRE and auto lending.  However, in the near term, asset quality is not an issue for the banking system.  We expect asset quality to gradually return to normal or historical rates.

Companies referenced herein are for illustrative purposes only and do not serve as any recommendation to buy or sell any security.