Let's Talk Loans - Vol. 30

Thanks for returning to another discussion about what's trading and trending in the loan market. Public service announcement: with the Thanksgiving holiday next week there will be no LTL. I hope everyone gets to enjoy a great long weekend with family and friends.

A relatively quiet news week as we start to inch towards the holidays. A few thoughts on rates. We had that lower than expected CPI number last week. The pivot trade raged as we had conquered inflation. Since then, just about every Fed governor possible has gotten on stage and made statements such as:

St. Louis Fed President James Bullard noted that “the policy rate is not yet in a zone that may be considered sufficiently restrictive.”

or:

?San Francisco Fed President Mary Daly told CNBC on Wednesday that she expects more rate rises and that a “pause is off the table” even with a lower level of rate increases.

or:

Federal Reserve Bank of Boston leader Susan Collins said on Friday “I expect this will require additional increases in the federal funds rate, followed by a period of holding rates at a sufficiently restrictive level for some time”

On last Thursday's rally we saw the 2 year drop from 4.57% down to 4.33% and the 10 year drop from 4.09% to 3.81%. What's interesting, as each of these Fed governors have spoken we've seen the 2 year sell off (price down / yield up) and yields have risen to 4.49%. The 10 year has been more muted and is essentially flat to where we rallied last Thursday (3.79%).

That's lead to historic spreads on 2s and 10s. We're back to 1982 levels in the differential on what has been a historically accurate predictor of a recession. This time is, of course, different.

Rising rates are starting to show a slowing of loan growth across depositories. While there is still positive growth, the pace of that growth has slackened. Per S&P

"Including PPP, gross loans and leases stood at roughly $2.060tn, an increase of 3.4% from the linked quarter. However, compared to the second quarter, the sequential loan growth rate was slow in the third quarter"

Looking deeper at the consumer, the NY Fed released their Q3 numbers on Household Debt. The headline is worrisome:

"Credit card balances also increased by $38 billion. The 15% year-over-year increase in credit card balances represents the largest in more than 20 years"

We've talked in these discussions on the concept of good debt and bad debt. Is this growth the consumer trying to keep up due to inflationary pressures (bad spending) or is it simulative spending to spur growth?

Further looking at credit performance. Loans moving from current to a 30 day DQ status continue to "normalize". As you budget for 2023, you should look to 2018-19 type historical performance.

"The share of current debt becoming delinquent increased for nearly all debt types, following two years of historically low delinquency transitions. The delinquency transition rate for credit cards and auto loans increased by about half a percentage point, similar to increases seen in the second quarter"

CECL goes live on Jan 1. Provisions for many institutions continue to be on the rise as a result of the gradual weakening of the economy and normalization of credit. Those of you posting CECL reserves for the first time next year should consider this a benchmark.

"Provisions for expected credit losses at U.S. banks have risen for the sixth consecutive quarter"

"Fifteen of the 20 largest banks in the U.S. reported quarter-over-quarter increases to their reserves as a percentage of gross loans at Sept. 30, while three reported decreases and two reported no change"

Slowing loan growth might not necessarily be a bad thing for several of you. With rates still on the rise, deposits are also under some pressure. We've had a number of conversations and strategies built around doing a borrowing to successfully accomplish a loan purchase or to continue lending. Dusting off the playbook on the FHLB or brokered deposits is probably worth your time.

"Some depositories are also filling in the gaps by turning to costlier options, such as the brokered deposit market or the Federal Home Loan Bank system, to fund their loans"

Enjoy your short next week! M22-54774