What Bankers are Thinking
And what it means if you're a borrower
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America’s bankers are feeling gloomy. At least that is what the Federal Reserve Senior Loan Officer Opinion Survey (SLOOS) found in the month of January. The SLOOS, which is administered quarterly to senior loan officers at about 80 U.S. banks, offers an inside look at how America’s top lenders view the economy and, in turn, how their banks’ lending practices are evolving with those views in mind.
The January SLOOS paints a picture of banks that are tightening up and hunkering down. Many of the bankers surveyed expect deterioration in the creditworthiness of their current loan portfolios in the months ahead. And more bankers expect lending standards to continue to tighten in the year ahead versus those who see a loosening. In fact, not a single senior loan officer in the survey sees an easing of credit standards for the rest of 2023 in nearly any category of lending.
Let’s dig into three general categories of SLOOS data: demand for loans, underwriting standards, and expectations for the year ahead.
Demand for Loans
On the question how demand for commercial and industrial loans has changed over the past three months from large businesses (other than for reasons of seasonality), 54% of respondents said that demand was about the same, 37% said demand was moderately weaker, 8% said demand was moderately stronger, and 2% said demand was substantially weaker. Responses were similar for demand from smaller businesses.
On the question of how demand has changed for construction and land development loans, 44% said demand was somewhat weaker, 35% said it was about the same, 20% said demand was substantially weaker, and 2% said it was somewhat stronger. Demand was similar although modestly weaker for non-residential properties.
On the question of how demand has changed for multiunit residential properties, 45% said demand was moderately weaker, 42% said demand was about the same, 9% said demand was significantly weaker, and 5% said demand was moderately stronger.
93% of respondents said that demand for home loans was either moderately or substantially weaker. Just 7% said demand for home loans was about the same. No respondents said that demand was higher.
Credit Standards for Loan Approval
On the question of how credit standards have changed over the past three months on commercial and industrial loans to large and middle-sized borrowers, 55% of respondents said their standards were unchanged, 43% said they had tightened somewhat, and 2% said they had tightened significantly. 0% said that standards had eased. Responses were similar for commercial loans to small-sized borrowers.
On the question of why credit standards have tightened for commercial and industrial loans, 100% of respondents said that it was due to a less favorable economic outlook (50% said this was somewhat important and 50% said it was very important; 0% said the less positive economic outlook was not important at all).
On the question of how credit standards have changed for construction and land development loans, 54% of respondents said that standards have tightened somewhat, 31% said standards were about the same, and 15% said that standards had tightened considerably. 0% said that standards had loosened.
On the question of how credit standards have changed for multifamily residential properties, 52% said that standards had tightened somewhat, 43% said standards were unchanged, and 5% said standards had tightened considerably. 0% said that standards had eased.
95% of respondents said that their credit standards for home loans had remained essentially unchanged, although as noted above demand for these loans has plummeted.
Broadly speaking, credit standards for credit cards, auto loans, and personal loans were roughly 80% unchanged and 20% moderately tighter. Very few respondents in any of these categories said that standards were looser.
Expectations for the Year Ahead
Over half of respondents (53%) said they expect their credit standards for commercial and industrial loans to small businesses to tighten somewhat. All remaining respondents expect standards to remain about the same. No respondents expect standards to loosen. Responses were similar for loans to large businesses.
With regard to loans for construction and land development, 59% of respondents expect standards to tighten somewhat and 11% expect standards to tighten considerably. 31% expect standards to remain the same. No respondents expect standards to loosen.
For multifamily residential properties, 50% of respondents expect standards to tighten moderately, 45% expect standards to stay about the same, and 5% expect standards to tighten significantly. No respondents expect standards to loosen. Responses were similar for non-residential commercial properties.
84% of respondents expect standards to remain about the same for home loans while 16% of respondents expect standards to tighten somewhat.
The most common reasons given for explaining tightening credit standards are an expected deterioration in collateral values (30% of respondents said this was a “very important” consideration and 61% said it was a “somewhat important” consideration) and an expected deterioration in the credit quality of their banks’ current loan portfolios (20% said this was a “very important” variable and 53% said this was “somewhat important.”)
What It All Means
Banks are tightening up. Senior loan officers (and, undoubtedly, others within banks including CEOs and CFOs) are worried about the uncertainty of the overall economy, declining collateral values, and the potential for deteriorating creditworthiness of their borrowers. Rapidly rising interest rates have added fuel to this fire, as it just feels like a pretty uncertain lending environment right now to many.
Although my words and writing do not represent the community bank where I work here in Maine, I can say that what is evident in the SLOOS is what I am clearly seeing myself: demand for loans across the board is down and approval standards are tightening. Banks are getting less aggressive in a rising interest rate environment and with some economic uncertainty out there.
So what does it mean if you are a borrower? For starters, approvals on loan requests might not come as quickly or as readily as they have over the past several years. Banks may take a pass on deals they might have previously approved. And as I’ve written about before, deals just do not cash-flow as well with an interest rate that starts with a 7 or an 8 as they did when rates started with a 4 or a 5, so for that reason alone banks are not approving as many deals.
Sometimes people absolutely need loans, like if their business is experiencing a liquidity crisis and funds are immediately needed to pay for materials, ingredients, or payroll. The difficult lending environment puts these borrowers at the highest levels of peril. But other types of lending, like for land or real estate acquisitions, may be less urgent. My advice is to be patient. Don’t push for deals and risk overpaying at a high interest rate when both rates and real estate prices will come down eventually. We may be 12-18 months out from any meaningful decline in real estate values, but those who can keep some powder dry at the current moment will undoubtedly have opportunities in the years ahead to deploy their capital.
If you are interested, you can read the full SLOOS, which contains additional data and questions that readers might find interesting that did not quite fit into today’s article at the following link: https://www.federalreserve.gov/data/documents/sloos-202301-table1.pdf
Ben Sprague lives and works in Bangor, Maine as a Senior V.P./Commercial Lending Officer for Damariscotta-based First National Bank. He previously worked as an investment advisor and graduated from Harvard University in 2006. Ben can be reached at ben.sprague@thefirst.com or bsprague1@gmail.com. Follow Ben on Twitter, Facebook, or Instagram. Opinions and analysis do not represent First National Bank. © Ben Sprague 2023.