Banks report ‘stable’ loan growth, rising interest rates spurring deposits

Words such as “moderate,” “stable,” “slightly,” and “steady” largely described lending activity in Federal Reserve districts across the country in the latest Beige Book report released Wednesday.

In the report, which outlines economic and financial activity across the country based on information gathered from banks and other firms, most regions report lower or “stable” demand for loans, but with some districts reporting loans growing “modestly.”

Credit quality generally remained stable (or “little changed” from the last report), according to the report, and several regions reported improvement in loan quality (along with strong competition for “quality loans”).

Rising interest rates, on the other hand, are improving bank profitability and leading to core deposits growth, according to the report. In at least one case, competition for deposits, in the rising rate environment, was termed as “aggressive.”

The reports from the regions focusing on financial services included:

New York
Small to medium-sized banks in the district reported lower demand for consumer loans but stronger loan demand from the business sector. Bankers also reported a decrease in refinancing activity. Credit standards were unchanged across all categories. Bankers reported lower loan spreads for residential mortgages, commercial mortgages, and C&I (commercial and industrial) loans, and unchanged loan spreads for consumer loans. Contacts also reported an increase in the average deposit rate. Finally, bankers indicated that delinquency rates declined across all loan categories.

Financial firms continued to report modest growth on a year-over-year basis in credit card lending and in overall loan volumes (excluding credit cards). However, during the current period, credit card lending (reported without seasonal adjustments) grew moderately compared with modest growth during the same period last year, while loan volumes (excluding credit cards) grew at a moderate pace compared with slight growth.

During the current period, volumes grew moderately in mortgages and in commercial and industrial lending; grew modestly in commercial real estate and in home equity lines; and declined slightly in autos and in other consumer loans (not elsewhere classified).

Bankers continued to note rising deposit rate pressure and strong competition for quality loans. They continued to cite concerns that credit standards were slipping but noted few signs of credit quality deterioration.

Banking conditions were strong and steady. Demand for credit remained robust and came from both commercial and consumer segments. However, mortgage demand showed some signs of slowing and was held down by lack of housing inventory and by worries about rising interest rates. Most contacts reported that core deposits rose in response to higher interest rates, although some seasonal factors were at play as the holiday season approached. One contact noted that commercial deposits declined because clients invested cash in operations or equity markets rather than holding reserves.

Since the previous Beige Book, loan demand grew modestly. Overall, bankers said that demand for commercial real estate loans strengthened, while business and auto loan demand was unchanged. Meanwhile, residential mortgage demand grew at a modest pace. Deposit rates increased, and bank executives reported that competition for deposits remained aggressive. Credit quality remained stable and credit standards were generally unchanged. Interest rates for residential and commercial loans rose slightly in recent weeks.

Conditions at financial institutions were stable. Earnings improved, driven by higher interest rates that enhanced the net interest margin at most institutions. Credit quality generally remained positive, however some district institutions experienced an increase in bankcard delinquencies. Financial institutions continued to loosen underwriting standards due to slowing demand for credit and increased competition, particularly in the residential mortgage and the commercial lending portfolios.

Overall, financial conditions were little changed over the reporting period. Financial market participants noted the declines in equities prices and increased volatility. Business loan demand increased modestly, with contacts reporting growth in the construction, manufacturing, transportation, and energy sectors. Loan quality and lending standards were little changed. Consumer loan demand was flat overall, though contacts noted a slight increase in demand for auto loans. Consumer loan quality and lending standards were also little changed.

St. Louis
Banking conditions have weakened slightly since the previous report. Loan demand for commercial and industrial loans was unchanged relative to year-ago levels, while loan demand for mortgages slightly declined. Bankers expect stable demand growth overall into the first quarter of 2019. Credit standards overall tightened slightly relative to year-ago levels. Overall delinquencies remained relatively stable on a year-over-year basis, with only a slight increase for the final quarter of 2018. Commercial and industrial loan delinquencies are expected to remain unchanged in the first quarter of 2019.

Kansas City
Bankers reported steady overall loan demand compared to the previous survey period. Specifically, respondents reported a slight increase in demand for commercial real estate loans, while the demand for commercial and industrial loans, residential real estate, consumer installment, and agricultural loans fell. Bankers indicated loan quality improved slightly compared to a year ago and expected no change in loan quality over the next six months. Credit standards remained largely unchanged in all major loan categories. Overall, bankers reported a slight increase in deposit levels.

Growth in loan volumes moderated over the reporting period. The deceleration was broad based across categories, including commercial and industrial, commercial real estate, and residential real estate. Consumer loan volume growth held steady. The cost of funds and loan pricing rose further, and many contacts noted that loan pricing remained very competitive. Deposit volumes expanded, albeit at a slower rate. Despite the slowing in loan growth, outlooks remained optimistic.

San Francisco
Lending activity ticked down modestly over the reporting period. Growth in loan demand slowed modestly overall, with several contacts attributing most of the slowdown to higher interest rates. Net interest margins were flat to down slightly. Activity in the venture capital market was strong and equity valuations remained elevated despite some recent corrections. Credit quality continued to be healthy.

Beige Book – Dec. 5, 2018