Given market events in recent days, the latest 1Q18 Senior Loan Officer Survey probably doesn’t rank among the list of pressing considerations.
However, the marked deterioration in corporate lending growth headed the bearish concern hierarchy at this time last year and the flow through impact from higher inflation to rates and the second order implications for lending, debt service and economic activity was the seed in catalyzing the latest, doom loop reflexivity across rates-vol-equities .... so the market structure/volatility crash and credit trends are kindred market spirits of a sort.
Anyhow, in a financialized, developed market economy where there remain ~17X more obligations to pay dollars than there are actual dollars, credit still matters.
To quickly set the stage. Last year, in reviewing the multi-quarter slowdown in C&I and CRE lending, we offered the following:
“Credit trends are typically reflexive and self-reinforcing and this magnitude and duration of credit tightening is generally only observed during or preceding recessions. … however, a credible argument could be made that, in this instance, Credit trends are, at least in part, a lagged reflection of “this time was different” dynamics (industrial recession, capex recession, earning/profit recession without an “official recession”) – all of which are now demonstrating fledgling, positive inflections which may, again, subsequently flow through to credit trends on a lag.”
That contextualization proved prescient as we’ve subsequently comped out of the industrial/profit recession with 6 consecutive quarters of accelerating growth. Unsurprisingly, credit trends have followed pro-cyclically with CFO demand for bank debt and lenders proclivity for extending credit both continuing to improve on the margin.
Nearer-term, the baseline expectation should be for continued corporate credit expansion as investment decisions chase improved economic activity, strong earnings growth and a favorable (tax-reform subsidized) profitability outlook.
On the consumer side, the view remains more mixed as standards for both credit card and auto loans continued to tighten alongside lender expectations for a deterioration in credit quality across consumer loan categories.
Below is a summary review of the 1Q18 Survey highlights.
- C&I: Banks loosened both standards and spreads for C&I lending to large and medium firms in 4Q17. This quarter marks the fourth straight survey in which banks reported to have loosened underwriting standards for C&I loans. Accordingly, C&I demand was reported to have finally strengthened, albeit, on the margin, after 5 consecutive quarters of reported weakening.
- CRE: Standards for loans across the commercial real estate complex have now tightened for the last 10 quarters, while demand has largely fallen in tandem for four straight quarters.
- Residential Real Estate: While banks reported looser underwriting standards across effectively all residential loan categories, demand weakened for all categories of mortgage loans for the second straight quarter.
- Consumer: Banks tightened underwriting standards for both credit cards and auto loans in 4Q17. Lenders have now reported tighter auto lending criteria for seven consecutive quarters, with auto-loan demand once again reported lower after having previously strengthened likely due to hurricane-related vehicle replacements. Demand for credit card loans was reported as unchanged.
- Special Feature: The 4Q17 SLOS included a special set of questions targeting domestic lender expectations for delinquency and charge-off behavior in 2018 across loan categories. A net percentage of domestic banks expect credit quality to improve for C&I loans in 2018, while credit quality is largely expected to deteriorate in consumer categories, namely within credit card portfolios. Moreover, the credit quality outlook is, on a net basis, and on the margin, negative for both commercial and residential real estate loan portfolios in 2018 as well.
*Note: in the figures below positive numbers correspond to a net percentage of banks reporting expectations for higher credit quality, while negative numbers correspond to a net percentage of banks reporting expectations for lower credit quality.
