Let's Talk Loans - Vol. 25
Welcome back to Let's Talk Loans. If you're looking to dive deeper into the world of lending, you've come to the right place. What's trading and trending on the minds of community and regional bankers. I hope you enjoy the content and please share / subscribe with a peer.?
Another month, more "hot" inflation. The "pivot" trade continues to get destroyed as bankers and investors become desperate to get back to cheap money soon. Remember, higher inflation is bad, it means the Fed will not get back to cutting rates more quickly. Unfortunately, we continue to get "surprised" by higher levels of inflation and then the market sells off (lower prices / higher yields). The below posting was just before the CPI announcement, then just after the CPI announcement. 2 year jumps 18bps in yield. We've given some of that back as of this morning (4.41%). The 10 year jumped north of 4.0%, which has also given some of that back as of this morning (3.95%).
There was nothing in the numbers that gave any of the pivot trade hopeful something to cheer about. A series of tweets from Mark Zandi I think tells the story.
I want to keep drawing attention to rapidly rising funding costs. We hear from customers daily that cash is quickly drying up and they are running into a "surplus funds" crunch. Deposits at community lenders are flowing out at "record" levels . Loan demand in Q2 was a monster and early signs of Q3 numbers keep that theme current. Lenders have been slow to raise rates, are often making loans at below market coupons and generating loans that are immediately valued at a loss.
A few quotes from a LinkedIn post earlier in the week. Regarding deposits:
"Deposits across U.S. banks fell 1.1% from June 29 to $17.779tn on Sept. 28, according to weekly Fed data without seasonal adjustment. That figure was a bit smaller than the 1.4% decline from March 30 to June 29, but Q2 is generally boosted by seasonal factors like tax refunds"
Regarding loan growth:
"Industrywide loan growth was robust in the third quarter with a 2.5% increase from June 29 to a seasonally adjusted $11.686tn at Sept. 28"
And per CUNA for our credit union clients.
“Surplus funds (or cash plus investments) were $634.2 billion on Aug. 31 — the lowest level since January 2021. August’s surplus funds fell 12% from a year ago, and fell 4.8% from the previous month. The liquidity ratio (the ratio of surplus funds maturing in less than one year to borrowings plus other liabilities) fell from 14.8% in July to 13.5% in August”
Auto lenders - I want to draw your attention to a DECLINING Manheim index. We've enjoyed several years of very strong auto values. That is starting to fall back down to earth. This will have an impact on recovery rates.
"Used car and truck prices, a key driver of inflation last year, are set to drop for a third straight month, but by a much greater extent"
Mortgage rates continue to follow the Fed hikes and a climbing 10 year.
"The average 30-year fixed mortgage rate hit 6.92% this week, according to a survey of lenders released Thursday by mortgage giant Freddie Mac. Many lenders are offering rates well over 7%. A year ago, the average rate was 3.05%"
Lastly, it's the start of bank earnings. JPM and Wells Fargo have reported numbers. This can give lenders a look into what the largest banks are experiencing. This will trickle down to the more regional and community depository lenders as well. A consistent theme, higher reserves for losses. On Wells Fargo:
"The bank added $385 million to its reserves to cover potential loan losses, a move it attributed to the less favorable economic environment"
And on JPM following up to Jamie Dimon's comments earlier in the week.
"the bank set aside an additional $808 million for potential loan losses, part of $1.5 billion in total credit costs. A year ago, the bank had been reducing its reserves for potential loan losses, pulling out $2.1 billion as it said the pandemic was moving to the rearview mirror."
I look forward to seeing folks soon at various industry conferences. We have a full slate in the coming weeks:
Have a great weekend! M22-23773