Most banks in the U.S. expect loan delinquencies and charge-off rates to improve in 2011, a Federal Reserve survey showed, as standards eased and demand increased for business lending.
“Expectations were significantly more upbeat than in past years,” the central bank said today in its quarterly survey of senior loan officers. “Banks reported that they expected improvements in delinquency and charge-off rates during 2011 in every major loan category.”
An improvement in business lending may help push down an unemployment rate lingering near a 26-year high as companies borrow to expand and hire more workers. Fed policy makers led by Chairman Ben S. Bernanke last week reaffirmed plans to pump $600 billion into the financial system, saying economic growth has been “insufficient to bring about a significant improvement in labor market conditions.”
“We’re starting to see loan demand turn up, and that’s a very important indication that the financial system is healing and the commercial banking system is getting stronger,” said Michael Darda, chief economist and chief market strategist for MKM Partners in Stamford,Connecticut. “When that happens you usually see a step up in job creation as well.”
Banks continued to ease standards and terms for commercial and industrial loans in the fourth quarter, the survey also showed. By contrast, changes in terms for consumer loans were “small and mixed,” it said.
Treasuries Decline
Treasuries fell for the first time in three days after reports earlier today showed consumer spending rose more than forecast in December and businesses expanded in January at the fastest pace since July 1988.
The yield on the benchmark 10-year Treasury note rose six basis points, or 0.06 percentage point, to 3.38 percent at 3:18 p.m. in New York.
The Fed survey showed the outlook for business loans improving the most, with 80 percent of banks expecting improvement for large and medium businesses and 70 percent expecting an improvement for small businesses. Banks reported increased demand for business loans on net for the first time since 2006.
“No bank reported that they expect deterioration in the quality” of commercial and industrial loans to firms of any size this year.
Banks also expect better quality consumer loans in 2011, with 57 percent predicting an improvement in credit card loans. For other types of consumer loans, 47 banks expect improvement.
Real Estate
The volume of commercial and industrial lending increased at an annual rate of 7.6 percent last month, the largest gain since October 2008, according to Fed data in a separate report. Total bank credit has risen in three of the past six months as business loans cushioned against declines in real estate and consumer credit.
Lending to businesses is still far from its peak. Commercial and industrial loans have fallen to $1.23 trillion as of Jan. 12 from $1.62 trillion in October 2008. Commercial real estate loans have dropped to $1.49 trillion from $1.73 trillion in December 2008.
Banks reported easing standards and terms on business loans, today’s survey showed. Seven banks loosened standards for firms with $50 million or more in sales, while only one bank tightened, and 17 reported reducing the cost of credit lines, while two tightened. The rest reported conditions were unchanged.
Improved Quality
Assuming that the economy progresses in line with consensus forecasts, 45 of 55 banks said they expect improved quality for loans to businesses, and 10 said they expect conditions to stabilize. None foresaw deterioration.
The world’s largest economy will grow 3.1 percent in 2011, up from December’s estimate of 2.6 percent, according to the median of 71 economists surveyed by Bloomberg from Jan. 3 to Jan. 11. The economy expanded 2.9 percent last year, the most in five years, after shrinking 2.6 percent in 2009.
Bank of America Corp. and Citigroup Inc. raised $810 million as of last week for funds that invest in leveraged loans, as prices of the debt rise to the highest since November 2007. The collateralized loan obligations, which buy leveraged loans and slice them into securities of varying risk, are the first to be raised this year. Banks issued more than $3.4 billion of similar funds backed by widely syndicated loans in the U.S. last year, according to data compiled by Bloomberg.
Marathon Loans
Houston-based Marathon Oil Corp., the largest refiner in the Midwest, announced Jan. 13 that it secured $4.5 billion in loans from banks including Morgan Stanley and JPMorgan Chase & Co., reviving a plan to spin off its fuel-making business that had been delayed in 2008 by turmoil in financial markets and falling commodity prices.
Banks reported no change in their standards for commercial real estate loans, according to the Fed survey, while demand improved. Among large banks, 14 said demand for such loans increased, while two said it weakened. Overall, demand for commercial real estate loans was “the strongest reading since early 2006,” the report said.
The survey of loan officers at 57 U.S. banks and 22 U.S. branches of foreign banks was conducted from Dec. 22 to Jan 11 the Fed said. The report doesn’t identify respondents. The panel of domestic banks had about $6.7 trillion in assets, or about 64 percent of the total assets for all domestically chartered, federally insured commercial banks.
