Index of Banking Activity Points to Modest Gains in August

Business activity in the banking sector increased in August for the third straight month, according to industry executives surveyed for American Banker's latest Index of Banking Activity, but hints emerged that credit may have become slightly more difficult for consumers to access.

The IBA's August overall reading of 54.0 was essentially unchanged from July's 53.9 level. Both readings are indicative of modest growth across retail banking's primary business lines. The IBA is a product of American Banker's regular surveys of bank executives and is published in partnership with VantageScore Solutions. The August index was based on 244 responses.

Lending components of the IBA had been consistently positive in the index's initial two readings. That changed in August, as respondents for the first time said that their rejections of consumer loan applications increased versus the month before. The reading of 50.7 in the consumer-loan-rejection component was just a trace over 50, indicating that the variation was mild at most.

The IBA is a diffusion index. Readings above 50 in the composite indicate a monthly expansion of activity and readings below 50 point to contraction. (In the case of contrary indicators, such as the component that tracks loan-rejection rates, a reading above 50 is considered evidence of deterioration in business activity.) The further from 50 a reading is, the stronger the indicated change.

Loan-application rates contributed to the index's positive reading, offsetting - and perhaps somewhat explaining - the rise in consumer loan rejection rates. The August reading for consumer loan applications came in at 54.6, up from 54.3 in July. The component that tracks commercial loan application levels climbed to 56.5, up from 53.0 in July.

August readings in consumer and commercial loan pricing indicate that banks are still challenged in this area, but both indicators pointed to a possible easing of competitive pressures. The reading of 43.0 in consumer loan pricing was still quite weak, but up significantly from July's 37.7 reading. The commercial indicator came in at 38.8, up from 34.5 in July.

Deposit account activity continued to provide a lift in August: the component that tracks net checking accounts registered a 60.0 reading, down a bit from 62.2 in July, while the deposit pricing component (which is a cost-of-funds factor, and therefore is treated as a contrary indicator) had a reading of 40.0 compared with 35.7 in July.

The composite index is a simple average of readings on a range of indicators based on responses to survey questions on topics that include volume and pricing trends in commercial and consumer lending, loan balances outstanding, and deposit account activity. Executives are also asked about staffing levels at their institutions, as well as business and real estate conditions in markets where they do business. Every attempt is made to ensure that the breakdown of companies included in the executive panel are representative of the industry on a number-of-institution basis.

Values for each component of the index are equal to the percentage of responses indicating increased activity plus one-half of those indicating "no change." Component scores are then averaged to arrive at a composite (when calculating the composite, contrary indicators such as delinquencies are scored inversely — the component figure is subtracted from 100).

Monthly readings will be presented as a time series that can be used to monitor the prevailing rate and direction of change in banking business cycles and eventually to benchmark whether an institution is operating in line with overall industry trends.

The next Index of Banking Activity, featuring data from the August survey, will be reported in late October.