Bankers uneasy about impact of end to PPP, loan deferrals, latest Beige Book indicates

While a number of bankers and financial institutions reported improving financial conditions over the last six weeks, many others expressed concern about what happens to conditions once incentives subside that were adopted to help fight the impact of the coronavirus pandemic, according to the Federal Reserve’s latest Beige Book.

In many of the Fed’s Reserve Bank districts, bankers and other financial institution representative said lending demand had increased at least modestly for commercial and industrial (C&I) loans, residential mortgages, auto loans commercial real estate. But many of the bankers expressed concern about what will happen to loan demand, and bank profitability, once loan deferrals and programs such as the Paycheck Protection Program – meant to help small businesses keep their employees paid – run out.

“Most bankers noted that the third and fourth quarters will tell, as deferrals run out and businesses must begin to meet their loan obligations,” the Philadelphia reserve bank reported. “As of late May, 16% of the firms in our weekly survey indicated that they were very concerned about maintaining solvency; 22% were somewhat concerned.”

“Contacts suggested that demand for business loans, particularly Paycheck Protection Program (PPP) loans, slowed substantially after large increases in March and April,” the reserve bank of Cleveland reported. “Most contacts reported that delinquency rates remained relatively low, but several expressed concern that delinquencies may increase when PPP funds run out and government-provided assistance diminishes.”

The St. Louis Fed indicated that bankers in its region are taking actions in anticipation that those programs are not extended. The reserve bank reported that its banking contacts “have expressed concerns about profitability due to the expectation of a longer-term low-rate environment and higher delinquency rates. As a result, many bankers have reduced deposit rates to offset margins.”

As an alternative credit source to help shore up an economic recovery, at least one banker indicated the Fed’s Main Street Lending program falls short. “Contacts said there was some interest in the Federal Reserve’s Main Street Lending Program, but that many businesses had access to cheaper credit elsewhere,” the Chicago Fed stated.

Others, however, are taking a more optimistic view. “On average, bankers said roughly 15% of their total loans were currently in deferral,” the Dallas Fed reported. “Expectations regarding general business conditions improved, and the outlook for future loan demand turned positive for the first time since March.”

Beige Book – July 15, 2020