Credit quality is a top worry for community banks in 2023, given the looming threat of recession.
Of more than 100 lenders polled by the Risk Management Association, 84% ranked potential loan losses as a major challenge for the year ahead. That fear trailed only cybersecurity, which was cited by 85% of respondents. The RMA surveyed more than 100 bankers in the second half of 2022, focusing on executives at banks with $10 billion of assets or less.
"Community banks continue to face unprecedented risks and extraordinary demands on their time, attention and resources," said Nancy Foster, the RMA's president and CEO.
At issue: Following multiple Federal Reserve
Historically, however, recessions follow pullbacks in spending, stifling loan demand. During economic downturns, loan losses also tend to rise, driving up banks' credit costs and cutting into profits.
"You inevitably get the real potential for credit issues with a slowdown in the economy," said Michael Jamesson, a principal at the community bank consulting firm Jamesson Associates. Small, locally focused banks are often concentrated on commercial real estate lending, financing the properties of their bread-and-butter small-business clients. "And areas of CRE are potentially vulnerable if we do get a recession" in 2023, Jamesson said.
Analysts say small businesses are
Office properties, too, are particularly
More than 10% of U.S. office leases expired in 2022, according to estimates from the real estate services company Jones Lang LaSalle. With more Americans working from home following the coronavirus outbreaks of recent years, employers this year are expected to decide against renewing office leases and others could downsize to smaller spaces. Both developments could hamstring landlords, leaving them with partially empty buildings and dwindling revenue. Loan defaults could follow.
"Fears about a turn in the credit cycle create a
Beyond credit quality, cybersecurity expectedly ranked atop community bankers' concerns, the RMA said. Most lenders this decade hastened their efforts to provide the digital services that customers are embracing as technology advances. However, as this happens, hackers are increasingly active, necessitating that banks both invest more in cybersecurity and brace for greater risk of criminals exploiting digital platforms to rob lenders or steal customers' private information.
"Every bank is hyperaware of cybersecurity — or should be," Charles Wendel, the president of Financial Institutions Consulting, said in a recent interview.
The RMA poll found several other areas of trepidation. Survey respondents also ranked operational risk (65%) information-technology challenges (62%), interest rate risk (57%) and regulatory compliance hurdles (50%) as leading worries.