The net percentage of US banks reporting tougher standards for commercial and industrial lending in the first quarter was 46%, up slightly from the fourth quarter of 2022.


Midsize banks are beefing up their commercial lending underwriting as they care slightly more than big banks about liquidity and funding costs, according to a new Federal Reserve survey of top bank lending officials.

The survey was closely watched as it follows recent turmoil in the banking industry, which has raised concerns that a pullback in bank lending could slow economic growth.

Banks were already taking a more cautious approach to underwriting going into this year, a trend that continued into the first quarter. The tightening was most notable for business loans at midsize banks, which the Fed survey defined as those with between $50 billion and $250 billion in assets.

“Overall, tightening of standards for commercial lending was reported more frequently at midsize banks than at larger banks or other banks,” the Fed said.

The survey, conducted from late March to early April, found that small and medium-sized banks “reported concerns about their liquidity positions, deposit outflows and funding costs more frequently than larger banks,” helping to explain his setback.

Overall, the net percentage of domestic banks that tightened standards for commercial and industrial lending was 46%. That was up slightly from the previous quarter, but it marked a significant reversal from 2022, when many more banks eased standards rather than tightening them.

The industry expects further tightening across all loan categories for the rest of the year, according to the survey. Sixty-five domestic banks and 19 US divisions of foreign banks responded to the survey.

“Banks most frequently cited an expected deterioration in the credit quality of their loan portfolios and in the values ​​of customer collateral, a reduction in risk tolerance, and concerns about bank financing costs, liquidity position banking and deposit outflows as reasons to expect tightening lending standards during the remainder of 2023,” the Fed said.

But given the significant pullback over the past year, the headline numbers haven’t moved much, according to Brandon King, a banking analyst at Truist Securities.

“This suggests that while the standards continue to tighten, there does not appear to be an outsized impact from recent events and a continuation of the tightening trend from last year,” King wrote in a note to clients, adding that “fears of a substantial credit crunch may be misplaced.

The data showed “a more modest tightening of credit standards than feared,” wrote Matthew Luzzetti, chief US economist at Deutsche Bank, in a note to clients.

The survey results align with recent comments from bankers, many of whom have shared that they have become more selective with the loans they make and are taking less risk. The tougher approach is particularly noticeable in areas that grew during the pandemic or struggled, such as auto loans or commercial real estate.

Citizens Financial Group executives “feel pretty good about where we are right now” in their book on consumer lending, Brendan Coughlin, head of consumer banking at the Providence, Rhode Island-based bank. But it has “adjusted a lot in the last 6 to 9 months just as a precaution,” he added.

“We’ve done credit tightening, not because we’re seeing anything we don’t like, just out of an abundance of caution to make sure we don’t have any tail risk in any of the portfolios,” Coughlin said on the bank’s quarterly earnings call last month. , according to a transcript from S&P Global Market Intelligence.

Banks are also seeing lower demand for most loans, the survey indicated. While banks are implementing stricter standards for commercial and CRE loans, they are also seeing weaker customer demand for both, according to the survey.

In C&I loans, for example, the net percentage of banks reporting stronger demand fell to -55.6%, indicating that many more banks saw weaker demand during the quarter. The picture looked very different in the third quarter of 2022, when the net percentage of banks reporting stronger demand was 24.2%.

Demand also weakened for residential real estate loans, home equity lines of credit and auto loans, although it was “basically unchanged for credit cards,” according to the survey.

“I think both the bank and our clients are taking a more conservative approach,” Christopher Bagley, president of Tupelo, Mississippi-based Cadence Bank, said on an earnings call last month. Higher interest rates and uncertainty about the economic outlook are holding back demand, he said, according to a transcript from S&P Global Market Intelligence.

Fed Chairman Jerome Powell previewed the survey results last week and said they were “broadly consistent” with the moderation in lending the Fed has been watching for months. But he also said that recent strains in the banking system “seem to be resulting in even tighter credit conditions” that are likely to hurt the economy.

Those effects remain “uncertain” and the Fed “will continue to monitor very carefully” trends in the banking system as it decides on interest rates, he said.

Fed officials raised their benchmark rate to between 5% and 5.25% at their meeting last week, though Powell hinted at a pause in rate hikes when they meet again in June.

By admin

Leave a Reply

Your email address will not be published. Required fields are marked *