Costs for businesses and consumers surged in the pandemic's aftermath. Interest rates spiked. Economic activity eased.
In the wake of the Federal Reserve's aggressive efforts to tame inflation by boosting rates 10 times since early 2022 and driving up borrowing costs, bank economists expect credit availability to
The American Bankers Association's Economic Advisory Committee, composed of bank economists,
The ABA's latest Credit Conditions Index, released last week, generated a paltry reading of 7.3. That was down from an already bleak
In response, EAC members expect that bankers will grow more cautious.
Lenders "are preparing for weakening economic growth and increasing financial challenges for consumers and businesses as the year progresses," said ABA Chief Economist Sayee Srinivasan.
As they did throughout 2022, banks reported stellar credit quality metrics for the first quarter, despite heightened worries about commercial real estate and increased cost pressures on small-business borrowers.
However, because of recession fears, an increasing number of lenders boosted reserves for potential future loan losses. They cautioned CRE broadly
"Segments of the office space have a significant amount of risk in them today," Wells Fargo President and CEO Charles Scharf said during a recent industry conference. He said the $1.9 trillion-asset bank in San Francisco is steadily reducing its office exposure to minimize losses.
"We look city by city; we look property by property to look at our exposures. And I would say there's no question that there'll be losses," Scharf said.
Some community banks that cater to local businesses also said they were closely monitoring those customers' ability to absorb higher expenses imposed by festering inflation and increased borrowing costs.
Frank Sorrentino, CEO of the $10 billion-asset ConnectOne Bancorp in Englewood Cliffs, New Jersey,
What's more, overall loan growth slowed in the first quarter as demand declined and as banks employed more conservative underwriting.
For example, median first-quarter loan growth among banks with $10 billion of assets or less slowed to 1.3% from 3% the prior quarter and 3.4% in the third quarter of last year, according to S&P Global Market Intelligence. Loan growth eased across all commercial segments, and consumer loans contracted by 0.1% during the quarter.
Second-quarter lending activity is also widely expected to prove sluggish when banks report earnings next month.
Still, ABA's Srinivasan said the Fed's efforts to rein in inflation have begun to show meaningful results, "reducing the need for additional Fed rate hikes," and "underlying strength in the labor market will provide a buffer for consumers and businesses."
Indeed, the federal consumer price index for May found prices increased 4% from a year earlier, down from a 4.9% increase in April and about half the rate of inflation from a year earlier.
