Last week we received updates from two quarterly credit-related releases from the Federal Reserve Senior Loan Officer Opinion Survey (SLOOS) and the FRBNY Household Debt and Credit Report. Credit growth is the foundation of real economic activity which is why we have been monitoring the space closely for signs of rate of change improvements. For 2Q24, banks tightening standards further decreased on balance, demand mostly improved, and the pace of acceleration in consumer-related delinquency rates slowed. In our view, the high-level takeaway is that these datasets have improved from the levels seen in 2023 and are not consistent with recessionary levels.
Starting with two of the broadest demand measures from the SLOOS data, domestic banks reporting stronger demand for business loans increased to -5.1 from -12.9, while demand for household loans decreased to 2.4 from 13.3. Both series are in a better position compared to the same quarter last year.
Source: Macrobond.
Sticking with broad measures, domestic banks reporting tightening standards for business loans declined to 9.2 from 13.0, but standards for household loans increased to 11.6 from 10.0. Again, both series are in a better position compared to last year at this time.
Source: Macrobond.
For Commercial & Industrial (C&I) loans to large and medium firms, banks reporting increasing spreads declined to -3.3 from 14.3, tightening standards decreased to 7.9 from 15.6, and stronger demand increased to 0 from -26.6. On the Commercial Real Estate (CRE) front, banks reporting tightening standards declined, and demand increased across all components. According to Federal Reserve H.8 data for domestically charted commercial banks, C&I and CRE loans make up 68% of all loans and leases in bank credit at 20% and 48%, respectively. Therefore, the rate of change improvement in standards and demand may impact the broader commercial bank credit setup, which we will continue to monitor through loan growth data from weekly H.8 reports.
Source: Macrobond.
Turning to the consumer side, SLOOS data indicated stronger demand for credit card loans and a modest decrease in the number of banks reporting tightening standards. For loan performance data, consumer-related delinquency rates are released in the FRBNY Household Debt and Credit report. In 2Q24, flows into early delinquency showed signs of improving in rate of change terms. The first chart below shows the absolute level of delinquency rates across loan types and the second chart shows the quarter-over-quarter change. To highlight one category, credit card delinquency rates increased in a range between 40 and 80 basis points each quarter going back to 2Q22 – that pace slowed to a 12-basis point change in 2Q24. The third chart shows a similar quarter-over-quarter trend for flows into serious delinquency with the largest delta occurring within credit cards, slowing to +32 basis points from +50, and other, slowing to -1 basis point from +28.
Source: Macrobond.
While pockets of the credit environment remain tighter than 2018 – 2019 levels, incremental improvements in the SLOOS data should be a positive for loan growth moving forward. According to the FRBNY data, the absolute level of delinquency rates in some loan types remain elevated relative to the five-year period preceding the pandemic, but the pace acceleration has slowed. Ultimately, both reports moved in a positive direction and do not line up with levels or rates of change seen in recessions.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Investment Strategist
Boyd Watterson Asset Management, LLC