Fed Survey Finds Optimism in Shorter Supply on Loan Quality

WASHINGTON — Although U.S. banks are expecting some improvement in asset quality this year across a variety of loan categories, they are less optimistic than a year ago, according to a survey released Monday by the Federal Reserve Board.

Of the 55 banks surveyed in the central bank's senior loan officer survey, nearly 60% said loan quality for commercial and industrial loans to large and middle-market firms would improve somewhat over the next year, while another 36% said quality would remain the same.

While still a relatively positive view, that was less than the 73% of respondents who last year expected similar commercial and industrial loans to improve in 2011.

"Expectations for improvement in 2012 were less widespread than they were a year ago, but last year's expectations were the highest in the history of the question," the Fed's survey said.

The report found largely similar findings for other loan categories. Roughly 55% of institutions said they expected improvement for C&I loans to smaller firms, down from 70% in last year's report.

In some cases, the drop in optimism may reflect good news, the Fed said, noting that banks were least likely to forecast improvement in the quality of consumer loans because they were already seen as "quite positive."

But in other areas, bankers foresaw little change, with most expecting the quality of residential real estate loans to stay the same in 2012, while only a third predicted an increase in loan quality.

Most respondents surveyed said they expect the asset quality of nontraditional real estate loans to improve in 2012. About 60% of firms, mostly large U.S. banks, said there would be some upgrade, while one institution said loan quality would likely "deteriorate somewhat."

The news was more positive when it came to commercial real estate lending, where some banks said they had eased terms and trimmed loan rate spreads.

"The January results were the first in five years to find a net easing in some of the CRE loan terms covered in the survey," the report said.

The Fed said that 12 institutions had eased standards, three had tightened them, and the preponderance of firms — 73% — had left their policies largely unchanged.

Eight domestic institutions said they had eased policies on maximum loan maturities, while other terms like loan-to-value ratios and requirements for take-out financing were relatively unchanged.

Foreign respondents reported tightening some terms and easing others on CRE loans over the past 12-month period.

For the second survey in a row, the Fed asked firms to weigh in on lending to European banks and their affiliates, as well as nonfinancial firms that have operations in the U.S. and significant exposures to European economies.

"Large fractions of domestic and foreign respondents again reported having tightened standards on loans to European banks or their affiliates and subsidiaries," said the Fed's survey. "There was more widespread tightening of standards than in the previous survey on loans to nonfinancial firms that have operations in the United States and significant exposures to European economics."

When it came to European firms and their subsidiaries, close to 58% of all domestic banks surveyed said they tightened standards, and another 42% reported keeping standards relatively the same.

For nonfinancial firms, a little over 37% of domestic banks surveyed reported they tightened standards "somewhat," while the majority of all institutions — about 63% — said standards stayed the same.

No one reported any easing for either institution.

Demand for credit remained little changed with close to 92% of institutions saying demand stayed the same or moderately improved.

Additionally, half of the respondents who reported competing with European banks noted an increase in business over the past six months as a result of the decreased competition from European banks.

Of the 55 banks who responded, 31% found that decreased competition helped improve their business.