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Bank economists have expressed cautious expectation that corporate lending will remain stable in 2024, signaling a shift in sentiment after a year of turmoil for the industry.
They still expect corporate credit conditions to worsen over the next six months, but the outlook for the sector is now the brightest it has been since late 2022, according to the American Bankers Association's latest Credit Conditions Index, which forecasts credit quality and availability.
ABA chief economist Saii Srinivasan said current credit conditions were better than many economists expected, leaving room for optimism for the future.
“If we go back more than a year ago, [Federal Reserve Board]”We were expecting we would be in a recession by now, and that hasn't happened,” Srinivasan said. “If you knew we were heading for a recession, your outlook in terms of credit supply and credit quality would be pretty pessimistic.”
The report, based on a survey of about 15 chief economists from the nation's largest banks that make up the ABA's Council of Economic Advisors, showed that while a majority of respondents expect the quality of business credit to worsen in the coming quarters, nearly half believe the availability of business credit will improve.
The business credit index, part of the overall index – a measure below 50 indicating the committee expects credit market conditions to worsen – rose to 26.9 in the first quarter, an improvement of 19 points from the end of last year.
Srinivasan said that despite the ABA credit index predicting worsening credit conditions, banks did not reduce lending as much as expected in 2023. He added that the latest data suggests that banks will continue to lend to businesses and consumers, especially if the Fed cuts interest rates as expected.
Many banks expect loans to remain roughly flat or grow slowly in 2024, after rising interest rates and industry uncertainty slowed loan growth. Webster Financial, BOK Financial and Huntington Bancshares each expect their loan portfolios to grow about 5% in 2024, with a margin of error of 2 percentage points, the banks said in recent earnings calls. Still, Regions Financial and KeyCorp said they expect total loans to decline this year.
Bank of America Chief Executive Officer Brian Moynihan said at an industry conference on Wednesday that the bank's commercial credit line expansion is “in a very challenging situation right now” due to customer concerns about economic uncertainty.
Plus, office loans have come under scrutiny recently after New York Community Bancorp Inc.’s stock price fell 37% the day it said its commercial real estate portfolio had taken a hit.ABA credit reports remain at a high standard because classifications can vary widely among financial institutions, Srinivasan said.
Despite volatility in the commercial real estate market, most bank executives continue to stress they are comfortable with the quality of their portfolios. The latest data from IntraFi shows that while bank executives are generally confident in their own firms' credit quality, more than a third are concerned about the industry's overall credit quality.
The ABA also measures temperatures for consumer credit and overall “headline credit,” which stood at 11.5 and 14.8, respectively, in the first quarter. Consumer credit rose 9.8 percentage points from the previous quarter, but the outlook for the sector remains near record lows amid concerns about credit quality.