Expected Lending Practices in 2018 and a Review of Q403.12.2018
In January, the Federal Reserve conducted its latest quarterly “Senior Loan Officer Opinion Survey on Bank Lending Practices”. They surveyed senior lending officers of 71 domestic banks on changes they have seen and anticipate in lending standards and commercial/consumer bank loan demand.
The Fed survey found that regarding commercial loans, banks in the fourth quarter had somewhat eased their lending standards for Commercial and Industrial (C&I) loans to large and middle-market firms. The Fed did notice, however, that some banks had tightened their standards for Commercial Real Estate (CRE) loans.
U.S. banks who are reportedly easing their credit policies on C&I loans in the fourth quarter cite more aggressive competition from other banks or nonbank lenders as the reason. However, the Fed said significant shares of banks also pointed to improvements in the favorability or certainty of the economic outlook, improvement in industry-specific problems, increased risk tolerance and increased secondary market liquidity as factors in having eased standards on C&I loans.
Demand for C&I loans from small firms strengthened, according to a modest net share of U.S. banks in the survey, but demand for such loans from large and middle-market firms was basically unchanged, the Fed said. Increases in customers’ needs to finance inventory, accounts receivable, mergers and acquisitions, and investment in plants and equipment contributed to stronger demand, as did a shift in customers’ borrowing toward other bank or non-bank sources.
Banks also reported that standards tended to remain unchanged regarding loans to households in areas such as consumer and residential real estate. At the same time, banks saw a weaker demand for auto loans and residential mortgages.
Currently, the Fed’s benchmark lending rate is in a range from 1.25 to 1.50 percent. There were three raises in 2017, with more raises expected in 2018. When the Fed raises interest rates, tighter conditions around borrowing usually result. However, from the results of the January survey, the Fed showcased an overall loosening of conditions due to the aggressive lending competition.
Outlook to 2018
The Federal Reserve also surveyed the 71 banks on what they expect 2018 will have in store pertaining to lending policies and loan performance. In general, the banks predict standards to ease in the categories of residential mortgages and C&I loans to large and middle-market firms. In contrast, they expect CRE and credit card loan standards to tighten.
A small percentage of banks anticipates an ease in lending standards on C&I loans to large and middle-market segments, which was a net 10% increase of banks from Q3’s survey. But most banks still expect to tighten loan rate spreads for the same firms. These categories are expected to stay practically unchanged for small firms. Overall, C&I loans in all firm segments are expected to increase in 2018.
Most banks agree that standards will tighten in all areas of CRE lending in 2018. In regards to residential loans, they see moderate changes in standards, demands, and attitudes in this category.
When looking at loan performance results, banks reported no significant change expected in terms of asset quality moving into 2018. However, a small portion expects the performance of construction and land development loans to decline somewhat during 2018.
The next meeting for policymakers is on March 20-21. This meeting will give insight into whether the Fed’s confidence in positive economic trends despite an overall loosening of lending conditions will remain a reality for the rest of 2018.
Reprinted with permission from Sageworks, a financial information company that provides analytical services and solutions to financial institutions.