Slower Loan Growth Dumps Ice on January's Index of Banking Activity

The banking industry's pace of expansion, which had shown signs of accelerating during the last half of 2012, appears to have lost momentum according to the most recent American Banker Index of Banking Activity (IBA).

The overall IBA for January was 53.8, falling from 56 a month earlier and marking the lowest reading since the index began tracking banker sentiment last June. Lower readings in the index's components that track loan applications and approvals were the primary drivers of the index's decline — its first in six months. The IBA is a product of American Banker's regular surveys of bank executives and is published in partnership with VantageScore Solutions. The latest installment was based on 312 responses.

January's reading for consumer loan applications fell to 49, compared to 54.5 a month earlier, suggesting slower growth in loan demand. Commercial lending also showed signs of losing steam; the reading for applications was 54.2 compared to 57.8 in December. The IBA also found a similar deceleration in loan approvals for consumer and commercial loans.

Loan growth also cooled significantly. January's reading for outstanding loans fell to 52.8 from 61.2 a month earlier. Seasonality could have played a role in the month's lending trends. It could also reflect a whipsaw effect from heightened activity late last year as companies tried to stay ahead of anticipated tax changes.

"December had a spike in activity with 2012 tax moves, particularly in real estate space," a banker said. "Activity slowed based partially on uncertainty of new tax legislation going forward."

The potential of sequestration cuts also loomed over the banking industry in January, respondents said.

"We are bracing for the psychological effects of sequestration coming in March," a lender noted. "I think we could grow out of this mess if politicians would just get out of the way."

There were very few categories that offset the deceleration in lending activity, though banks benefited from better pricing on the loans that they did make. The reading for consumer loan pricing strengthened to 48.9 from 44.4 in December. Commercial loan pricing also gained traction.

Staffing accelerated slightly, with a 50.2 reading in January compared to 49.1 a month earlier, though respondents noted that much of their hiring was associated with regulatory compliance. "There is an increased focus to meet the OCC's heightened expectations, which leads to increased resources to do so," one banker said.

A number of other categories that contribute to the IBA, including sentiment for market conditions and loan rejections, showed little change from December.

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. (For contrary indicators, such as the components that track loan delinquencies and 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.

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 effort is made to make sure that the breakdown of companies included in the executive panel is 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).