Tighter standards and weaker demand for commercial and industrial loans (C&I) were among the highlights of the April 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices released recently by the Federal Reserve.
Banks likewise reported tighter standards and weaker demand for commercial real estate (CRE) loans.
“With the fight against inflation, this sort of thing happens so it’s not surprising to see our peers experiencing the same things as we’re experiencing here at Peoples,” said Jeffrey Drobins, executive vice president, chief lending officer at Peoples Security Bank & Trust Company.
“Really, it’s probably the prudent thing that business owners who predict there could be a recession are not looking for credit, they’re holding on to cash. They’re worried about liquidity and leveraging their balancing sheets. Even our existing customers, that’s what we’re seeing them do.”
Rory Ritrievi, president & CEO at Mid Penn Bancorp, Inc., and Mid Penn Bank, said that through the first quarter of 2023, their organic loan growth had annualized growth of around 11%.
“That is at the top end of the range we projected for the year even though historically the first quarter is our slowest loan growth quarter of any year,” said Ritrievi.
“As a publicly traded company I cannot give loan growth numbers beyond that first quarter as we have not made any of the numbers past that point public, but I will say that our loan pipelines are just as brisk in the second quarter as they were in the first.”
Three sets of special questions comprised the April 2023 Senior Loan Officer Opinion Survey (SLOOS):
- Changes in banks’ lending policies for CRE loans over the past year.
- Reasons for banks changed standards for all loan categories over the first quarter of 2023.
- Banks’ exceptions for changes in lending standards over the remainder of 2023 and reasons for these changes.
Banks responded to the first of questions by reporting tightening lending policies for all categories of CRE loans over the past year. Wider spreads of loan rates over banks’ cost of funds and lower loan-to-value ratios were the changes most frequently reported.
In response to the second set of questions, banks cited a more uncertain or less favorable economic outlook, reduced tolerance for risk, deterioration in collateral values, and concerns regarding banks’ liquidity positions and funding costs.
The third set of questions concerning banks’ outlook for lending standards over the rest of 2023 led to banks reporting an expected tightening of standards across all loan categories. An expected deterioration in the credit quality of their loan portfolios and in customers’ collateral values, a reduction in risk tolerance, and concerns regarding bank funding costs, bank liquidity position and deposit outflows were cited frequently by banks as reasons for their expectations of tightening lending standards for the remainder of the year.
Survey results, as they have been in past releases by the Fed, are tabulated for two domestic bank size categories consisting of large banks and other banks. Large category banks contain $50 billion or more in domestic assets as of Dec. 31, 2022. All other banks have less than $50 billion in domestic assets.
The largest banks are defined as those with $250 billion or more in total domestic assets as of Dec. 31, 2022, and mid-sized banks as those with assets between $50 billion and $250 billion. Mid-sized banks reported more frequently than the largest or other banks the tightening in standards for business loans, these reports were for both for the first quarter and in expectation for the rest of 2023.
Mid-sized and other banks reported concerns about their liquidity positions, deposit outflows, and funding costs more frequently than the largest banks, as reasons for tightening standards on all loan categories, both in the first quarter and for the remainder of the year.