Purchase Mortgage Seasonality Slows Bank Activity Index

Consumer lending showed signs of slowing down, demonstrating how a shift from refinancing to purchase activity has introduced more seasonality to the mortgage market and overall loan portfolios.

The American Banker Index of Banking Activity, a sister publication of NMN, fell to 55 in October from 55.6 a month earlier, marking its fourth straight decline and posting its lowest mark since harsh weather put a chill on readings earlier this year.

A big factor behind the decline involved consumer lending activity, which grew at a decelerated rate in October. The reading for loan applications fell to 54 from 59.3, while the reading for approvals fell to 56.4 from 59.9. It was the second straight monthly decline for both tallies.

Several respondents pointed to a slowdown in mortgage originations. "A usual decrease in housing sales in the fall kept our consumer lending level down," one unnamed participant said.

The results provide some early insight into lending trends for the fourth quarter.

The Federal Reserve Board's October senior loan officer survey found "mixed" demand for mortgages. More than a quarter of lenders at large banks reported moderately weaker demand for prime mortgages, while 28% of smaller institutions had moderate increases. Demand for nontraditional mortgages was weak across the board.

Index of Banking Activity readings above 50 indicate monthly expansion; 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 evidence of deteriorating business activity. The further from 50 a reading is, the stronger the indicated change.

Commercial loan activity accelerated slightly in October, with readings for applications (56.5) and approvals (also 56.5) edging up from September. Overall, the reading for outstanding loans fell to 67.6 from 71.3 a month earlier, reinforcing a theme of slower growth.

Many lenders continue to struggle with commercial loan pricing as they try to avoid taking on excessive risk in the face of significant competition. The reading for commercial loan pricing was 45.9, unchanged from September but still indicating that lenders are lowering rates. (The reading has been below 50 for nine of the past 10 months.)

Consumer pricing also remains under pressure, with a 47.6 reading in October.

For some lenders, the response has been to draw a line on pricing, even if it means turning some borrowers away.

"Loan growth was more muted during the [third] quarter as we maintained our standards on pricing and terms," Tayfun Tazun, chief financial officer at Fifth Third Bancorp, said during an appearance last month at the annual BancAnalysts Association of Boston's conference. "The current environment and pricing levels leave little room for error in extending loans with riskier structures."

Other bankers are hopeful that they can slowly work in increases heading into the new year.

"There will be some movement to try to increase prices" in secured finance, Jamie Forese, co-president and chief executive of Citigroup's institutional clients group, said during a presentation at recent conference hosted by Bank of America Merrill Lynch. "I think there will be a pricing adjustment. Probably, it will be gradual, it won't solve the entire problem."

Bank staffing continues to improve. The reading for hiring rose to 54.7 in October from 50.9 in September, showing increased activity for the sixth consecutive month. However, a separate Bureau of Labor Statistics report on mortgage-specific hiring showed a slowdown in October.

Bankers remain relatively optimistic about the economy; the reading for business conditions was relatively unchanged in October from a month earlier, at 57.6.

The IBA is a product of American Banker's monthly surveys of bank executives. The latest installment of the diffusion index was based on 271 responses.

The IBA's 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.

Respondents are also asked to weigh in on staffing levels at their institutions, as well as business and real estate conditions in markets where they do business. Every effort is made to ensure that the breakdown of companies included in the executive panel is representative of the industry.

The values for individual components of the index are equal to the percentage of responses indicating increased activity plus 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.