Let's Talk Loans - Vol. 12

My apologies for missing a week. I had a lovely vacation back to the homeland of southwestern Ireland that had been postponed 3 times due to COVID. Originally booked in 2019, we finally got to go across the pond and enjoy some time away from the desk.

If you've signed up to hear about what's trending and trading in lending, you've come to the right newsletter. Greatly appreciate all of the positive feedback this has generated over the last few months and look forward to your future suggestions for talking points and topics.

First up, SFIG Vegas - one of the largest secondary market / fixed income conferences of the year. If you're attending, please reach out and visit on my panel discussion this coming Sunday (17th) at 2pm local time. Should be a great conversation surrounding the mortgage market and secondary execution. I'm joined by some great panelists.

Again dominating the news wires this week was inflation. It just will not go away. CPI came out mid week and it was again a new record level. Headline, highest in 40 years. Financial Times reports we are looking at 9.1% annual pace and that's a number we haven't seen since Nov 1981. It was broad based, little to give anyone anything to cheer about and further put pressure on Chair Powell to "get inflation under control".

The conversation increased the chances that the Fed will over correct, create a hard landing and generate a recession. Two weeks back we looked at loan performance for any inkling that losses or DQs were on the rise. I don't see anything firm in the data yet that points to stress in consumer credit, yet.

It's bank earnings week. JPM reported a Q2 profit down 28% from 2021. Diving deeper...

One of the big drags on earnings...increased reserve builds due to concerns of future recessionary fears. There was a lot to cheer from the news. Revenue was up at the commercial bank (8%), total loans increased (6%), net interest margin increased due to rising rates, non performing loans DECREASED from a year ago (but we did have a $428mm reserve build). Credit card debt up 17% and they report that most consumers have been balance sheet than pre-pandemic. As with most all mortgage lenders out there they had a big drop in mortgage originations (45%) and that's a headwind. One challenge JPM faced were likely not issues for our more community and regional depository clients - investment banking fees down 54% (no surprise). These quotes from executives help tell the story.

“The truth of that is we’ve looked very carefully into the actual data and results and there is essentially no evidence of any weakness in the actual results,” Chief Financial Officer Jeremy Barnum said about the economy. “The questions are about the outlook.”

“Businesses, when you talk to them, they’re in good shape, they are doing fine,” Mr. Dimon said. “We’ve never seen business credit be better in our lifetimes.”

Which leads me to one item I do worry about for our clients. That outlook fear starts to creep into behavior. Early Q2 lending numbers are starting to appear. I think they are going to be very robust. That organic growth has sucked some of the liquidity out of the market coupled with the fear that deposits are going to rise. I believe when the numbers are final we could see a net deposit outflow. Add that to credit tightening in the face of a possible hard landing / recession and reserve builds. The securitization markets are in minor disarray / inefficient right now due to the rapid move in rates. I think this contributed to balance sheet growth. From our friends at Moody's:

"Because capital markets volumes fell quite dramatically and spreads widened out, some borrowers turned back to their banks for loans," said David Fanger, a senior vice president at Moody's. "That's probably good in the sense that [it's] unlikely the banks are significantly weakening their underwriting standards at this point in the cycle," and instead are capturing borrowing on their balance sheets that would have gone elsewhere in previous quarters”

Loan volumes have shown a "blistering" pace in the first half of the year. One that will likely be hard to replicate in the second half of 2022. If I were budgeting for the next six months, I don't know that I would use the last 6 months as a proxy.

Pilling on to all this rising rate chatter, back on my soap box for raising your loan rates. Particularly for credit union auto lenders. We witnessed a similar event back in 2018 when rates rose quickly. Lenders were slow to adjust their rate sheets (also likely why you might see record loan origination levels in Q2). Look below at the disparity between bank rates and credit union rates on auto lending. Not sure why the author used 36 month used autos (would rather see 84 month) but I think the concept is sound. While coupons are largely in parity for mortgages, there is a great divide between bank and CU auto rates. This again is a great time to mention you need to have your portfolio analyzed so you can make sure you are lending at a market level!

I'll leave you with this. I'm the worst at taking time away from the office. In these crazy times it can sometimes be helpful to unplug, stop, spend some time with family and enjoy the view. Two shots from my time across the pond. We looked, unfortunately we didn't find the pot of gold. My 6 year old was heartbroken!