Nov 22, 2022

Checking in with Loan Officers

By Michael Buck

Checking in with Loan Officers

Since 1964, The Board of Governors of the Federal Reserve System has conducted the Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) which is designed to provide information on bank credit availability and loan demand. Administered quarterly since 1992, it can be a useful tool for investors to gauge developments in the credit cycle which is important both for macroeconomic assessments and bank stock investing. The survey respondents give feedback on both the demand for credit among consumers and businesses as well as changes in loan standards.

In early November, the October 2022 SLOOS polled 71 domestically chartered commercial banks and 18 U.S. branches and agencies of foreign banks, offering some insight into the amount of progress the Fed has made with its goal of slowing the economy to bring inflation back in line with targeted levels. If the Fed’s more restrictive monetary policy is working as intended, we should see demand for credit declining as businesses and consumers get more cautious and bank lending standards tightening in response to higher perceived risk to borrowers’ ability to repay loans.

Across the board, it appears the demand for, and availability of credit is declining as the Fed likely intends. For commercial and industrial lending, banks reported more restrictive standards for firms of all sizes (Exhibit 1) and weakening demand (Exhibit 2). The other major business loan category, commercial real estate, is seeing similar declines in demand for and supply of credit.

Exhibit 1: Respondent to Respondents and Standard to Standards

Source: Federal Reserve Board, Senior Loan Officer Opinion Survey on Bank Lending Practices

Exhibit 2: Strong to Stronger

Source: Federal Reserve Board, Senior Loan Officer Opinion Survey on Bank Lending Practices

With mortgage rates reaching levels not seen in years, it is no surprise that demand for residential mortgages is near record lows (Exhibit 3).

Exhibit 3: Net Percent of Domestic Respondents Reporting Stronger Demand for Mortgage Loans

Source: Federal Reserve Board, Senior Loan Officer Opinion Survey on Bank Lending Practices

Standards for various types of consumer loans moved into net tightening territory for the first time this cycle (Exhibit 4). Additional survey questions showed particular concern regarding extending credit to consumers with lower FICO scores.

Exhibit 4: Net Percent of Domestic Respondents Tightening Standards for Consumer Loans

Source: Federal Reserve Board, Senior Loan Officer Opinion Survey on Bank Lending Practices

These indicators of business and consumer credit all point to a meaningful slowdown in economic growth, potentially allowing the Fed to avoid having to raise interest rates to ever more restrictive levels to achieve their inflation objectives.

This information is not intended to provide investment advice. Nothing herein should be construed as a solicitation, recommendation or an offer to buy, sell or hold any securities, market sectors, other investments or to adopt any investment strategy or strategies. You should assess your own investment needs based on your individual financial circumstances and investment objectives. This material is not intended to be relied upon as a forecast or research. The opinions expressed are those of Driehaus Capital Management LLC (“Driehaus”) as of November 2022 and are subject to change at any time due to changes in market or economic conditions. The information has not been updated since November 2022 and may not reflect recent market activity. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Driehaus to be reliable and are not necessarily all inclusive. Driehaus does not guarantee the accuracy or completeness of this informa­tion. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

About Michael Buck

Michael Buck is a portfolio manager and a senior analyst on the US Growth Equities Team with a focus on the consumer discretionary, consumer staples and financials sectors. To follow Michael on our Twitter feed, look for tweets ending in MB.

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