The Fed recently released the Senior Loan Officer Opinion Survey (SLOOS). Said questionnaire reached the inboxes of 65 national bank executives on March 27, and the responses were due to be received on April 7. The report has been eagerly awaited by market participants as it contains information on how the largest banks are responding to the problems of their regional counterparts, which began with the failure of Silvergate and SVB a few weeks ago, and which they also led to the downfall of Signature Bank and, more recently, the takeover of First Republic Bank by JPM.
The report was expected to show further tightening in financial conditions, but the main question was: to what extent? The general opinion, which is consistent with ours, is that while there were signs of tightening, the situation could have been worse than what was published.
The conclusions show that 42.9% of those surveyed have “hardened somewhat” the criteria for granting loans to “large and medium-sized companies” (those with an annual turnover of more than 50 million dollars), while the 54% say they have “maintained basically unchanged”, compared to the previous quarter. These are percentages very similar to those of three months ago.
Furthermore, these figures are very similar to those reported by banks when asked about the rules applied to “small businesses”. On the household front, mortgage conditions continue to tighten, although we note that banks are applying less stringent standards in this segment than they are for commercial and industrial lending compared to their own historical records. Unsurprisingly, the rules for consumer lending were also tightened.
As has been reported numerous times, commercial real estate is in a tougher situation than residential and corporate lending. In the “Construction and Land Development Loans” subcategory, for example, 21.3% of banks reported having “significantly” tightened their standards. This is a much higher figure than the 3.2% of the entities that answered the same when asked about their “Large companies and medium-sized companies” segment.
While in the two subcategories of “Non-Residential Non-Agricultural Property Secured Loans” and “Multi-Family Residential Property Secured Loans”, the figures were 15% and 12.9% respectively, all well above the tightening reported for the business loans.
What also caught our attention was the demand for loans, according to the data provided by the banks. Most of them indicated that demand had declined, to varying degrees, for most loan categories. In our view, this is in line with the wishes of the Federal Reserve and reinforces the view of most market participants that the US monetary authority is almost done with rate hikes.
Contrary to what happens with the rules for granting loans in certain categories, which register a similar tightening in the number of banks compared to last quarter, demand continues to weaken in most products, a sign that they continue to be applied the usual lags of monetary policy.
In conclusion, we believe that the SLOOS reveals a tightening of lending criteria and a weakening of demand. This situation corresponds to the slowdown in growth, which in turn should help smooth out inflation. So far, we continue to believe that recent events are not the start of a banking crisis for the largest banks, and the SLOOS report confirms this. However, this does not mean that we think the negative headlines are over, sadly.
Some smaller banks have recorded large deposit outflows, which have been partly replaced by over-the-counter funding from the Fed, at higher rates, which in turn hurt net interest margins and medium-term profitability prospects. terms of these banks.
In our view, exposure to housing credit risk may also cause more headaches for markets in the future, although we expect markets to start to differentiate between different segments of housing credit risk and therefore , also between banks with different exposures.
2023-05-11 11:23:53
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