Loan demand is flagging in all major categories and, at the same time, bankers are raising the bar on who qualifies for credit, setting the stage for slower growth in 2023.
The Federal Reserve's latest quarterly senior loan officer opinion survey, released late Monday, found bankers reporting weaker demand and tighter standards across commercial-and-industrial, commercial real estate, mortgages and consumer loans. Banks tend to become more selective with lending when they worry about
Amid rapidly rising interest rates and stubbornly high inflation, bankers throughout the fourth-quarter earnings season warned they are preparing for
"Overall, the survey paints a sobering picture of the state of loan demand and standards," Piper Sandler analyst Scott Siefers said. "On the one hand, such dynamics are logical considering the softening economic picture. But on the other, they reinforce the notion of a weakening revenue backdrop and uncertain credit environment."
The Fed said it received responses from 69 domestic banks and 18 U.S. branches and agencies of foreign banks. Banks received the survey in December and responses were due by Jan. 6.
The slowdown in residential real estate lending arrived last year, when
On the CRE front, the survey found lighter demand and stricter standards for the third quarter in a row. Bankers have similarly reported growing more selective with C&I credits — and seeing waning demand — in recent surveys. These changes applied to both small and larger loans.
Alastair Borthwick, chief financial officer at Bank of America, said the Charlotte, North Carolina-based company expects to increase lending in 2023 at roughly half 2022's pace of 10%.
"It will be a quieter loan growth year," Borthwick said during the $3 trillion-asset bank's January earnings call.
Community bankers, too, say the operating environment is changing.
"I do think there is a sense of caution out there," Patrick Ryan, president and CEO of the $2.7 billion-asset
Following multiple rate hikes since last spring, borrowing costs are higher across all loan types. At the same time, business owners and consumers continue to grapple with high overall expenses. Inflation reached a 40-year high above 9% last June. It declined to 6.5% in December but remained three times higher than the Federal Reserve's preferred level of around 2%.
S&P Global Market Intelligence separately surveyed about 140 U.S. bank and credit union executives late in 2022, and two-thirds of them said they expect a recession and higher credit costs this year.
Terry Dolan, chief financial officer of U.S. Bancorp in Minneapolis, said more borrowers also are worried about inflation, high rates and forecasts for an economic downturn. The $675 billion-asset U.S. Bank anticipates a shallow recession this year, he said in an interview.
Loan growth of nearly 7% in the fourth quarter capped a strong overall year for the bank, Dolan said. The growth will continue, but it will likely "slow down some" throughout 2023, he said.
Analysts at D.A. Davidson said that in the past, when bankers grew cautious, challenging credit conditions tended to follow.
"This has proven to be a great leading indicator for turns in credit cycles," the Davidson analysts said in a report. "History has shown when banks go from easing underwriting standards to tightening, the bank group starts to enter the next phase of the credit cycle as net charge-offs begin to increase roughly one to three quarters later."
