Lending momentum proved robust by way of the primary half of the 12 months and into August. However a slowing economic system and steps taken to fight inflation might sign an finish to the increase instances.
The story thus far: U.S. banks grew second-quarter loans 4% from the prior quarter and 10% from a 12 months earlier, based on a Keefe, Bruyette & Woods evaluation. Neighborhood and regional banks led the cost, with sequential progress of greater than 5%.
In all, KBW mentioned, 94% of banks posted quarter-over-quarter mortgage progress and 99% reported year-over-year growth. The sequential and annual charges of progress within the second quarter each accelerated from the primary quarter. And midway by way of the third quarter, Federal Reserve knowledge level to continued progress of about 3% from the top of June.
Analysts and bankers say that business mortgage demand gained momentum as companies borrowed to put money into progress, together with new hires to satisfy demand for services and products that rebounded from pandemic-era lows. Assured shoppers additionally started to make use of bank cards extra.
Nevertheless, recession fears have mounted due to hovering inflation — client costs reached 40-year highs this summer time — and a surge in rates of interest. The Federal Reserve has boosted charges a number of instances this 12 months and signaled extra hikes lie forward to fight inflation. Traditionally, in durations of quickly rising charges, spending and borrowing slows. Costs have a tendency to say no because of this, easing inflation, however the economic system usually ideas into recession. To keep away from losses, banks have a tendency to drag again on lending amid financial downturns.
“We’ll see warning round inflationary pressures and the impression that rising charges could have on lending,” mentioned Daniel Goerlich, banking and capital markets offers chief at PwC.
Chris Nichols, director of capital markets on the $46 billion-asset SouthState Corp. in Winter Haven, Florida, mentioned many banks’ underwriting requirements are positive to develop into more and more conservative within the second half of 2022. Lending will seemingly sluggish earlier than the top of the 12 months, he mentioned, as banks develop into extra selective and as debtors balk at rising curiosity bills.
“Larger charges are going to sluggish every thing down,” Nichols mentioned.
Analysts at D.A. Davidson hosted a convention final week involving greater than 20 banks. The analysts mentioned in a report recapping the occasion that bankers are clearly “extra cautious” now than earlier within the 12 months.
“Credit score and recession threat was a constant subject of dialog,” with many banks “noting an elevated degree of present portfolio overview, together with extra aggressive stress testing of latest credit score requests,” the D.A. Davidson analysts mentioned.
They added that mortgage pipelines are smaller now than within the first half of the 12 months, they usually projected the tempo of mortgage progress would decelerate considerably over the ultimate months of 2022.
Michael Jamesson, a principal on the financial institution consulting agency Jamesson Associates, mentioned a pullback in lending is sort of inevitable. The one-two punch of upper costs and spiking curiosity prices will push would-be debtors to delay plans, he mentioned.
“Folks simply cannot sustain with the price of every thing,” he mentioned. “We have already seen this with residential mortgages, in fact.”
Certainly, purposes for loans to purchase properties within the week ended Aug. 12 declined 18% from a 12 months earlier, based on the Mortgage Bankers Affiliation. Refinancing exercise plunged 82%.
“Residence buy purposes continued to be held down by quickly drying up demand, as excessive mortgage charges, difficult affordability and a gloomier outlook of the economic system saved consumers on the sidelines,” mentioned Joel Kan, the MBA’s affiliate vice chairman of financial and business forecasting.
The 30-year fixed-rate mortgage averaged 5.13% final week, up sharply from 2.86% a 12 months earlier, based on Freddie Mac.
“The market continues to soak up the cumulative impression of the big value and fee will increase that led to a plunge in affordability,” mentioned Sam Khater, Freddie Mac’s chief economist. “Because of this, over the remainder of the 12 months buy demand seemingly will proceed to pull.”