Let's Talk Loans - Vol. 55

Welcome back. It's been an interesting week. Pictures of Armageddon coming out of NYC with the Canadian wild fires. The first ever indictment of federal crimes of a US President. If those are all topics you're looking to avoid, you've come to the right newsletter. Here we cover the issues surrounding banking and lending.

I've written a lot on liquidity of late in the banking system. It's no surprise to me the headline from Nick Timiraos , aka "the Fed Whisperer", that the BTFP has reached it's all time high and seen it's 5th consecutive weekly increase. Remember, the banking crisis is now behind us (making sure sarcasm rang through on that one). If that were true I wouldn't be constantly hearing from clients on our calls their concerns on how they fund their next loan or the pressure margins are starting to come under.

Along those lines, for those in lending, you have the age old pull and tug. There are loan officers, front line producers that are client facing and are the engine that generates the loan. Then there is treasury, the Treasurer or CFO, that is responsible for the funding side of the conversation. Managing profitability, margins, cost of funds, allocation of funds and the lifeblood of the institution. Increasingly, those two parts of the depository are at war. Regularly we hear from clients that say they need to slow down lending. The loan officers still desperately want to make the loan (at a below market rate) and the treasury team is screaming "we don't have the funding". Or the margin. That graph above is one of many examples I've posted recently as liquidity comes into focus. We are spending a significant amount of time with clients on analytics to help coach both the funding and lending side of the house to work together. A reset of expectations in this rate up environment is imperative.

Much like the impending recession, an avalanche of articles have been written on the demise of CRE. I did a flurry of posts this week. I think the below quotes do a nice job of summarizing the challenges that are coming to this sector. It's the early innings still - but if we do experience higher for longer - more of the below is coming our way and likely to get worse.

Interest-only loans as a share of new commercial mortgage-backed securities issuance increased to 88% in 2021, up from 51% in 2013, according to Trepp.

"Fitch Ratings recently estimated that 35% of pooled securitized commercial mortgages coming due between April and December 2023 won’t be able to refinance based on current interest rates and the properties’ incomes and values. While many malls and hotels face high default risks, the situation is particularly dire for office owners"

"Xiaojing Li, managing director at data company?CoStar’s risk analytics team, estimates that as much as 83% of outstanding securitized office loans won’t be able to refinance if interest rates stay at current levels"

Big headline today. The end of the longest bear market since 1948 and the start of a new bull market. As the equity markets continue to hope for that soft landing, stocks have rallied. Further, as the tech industry starts to believe the Fed is on pause, or soon to be cutting, so too has the NASDAQ turned around. Seems early or slightly optimistic to me but I believe my thoughts on this topic are well documented.

Making sure this headline is on your radar. While not final and only being loosely talked about, most agree this is coming. I've recently written that the finger is being pointed back at the FDIC, OCC and NCUA that they've been too lax. They've known about these underlying issues for several quarters and only slapped wrists, not issued penalties, and banks have failed as a result.

Per the WSJ:

The changes, which regulators are on track to propose as early as this month, could raise overall capital requirements by roughly 20% at larger banks on average, people familiar with the plans said. The precise amount will depend on a firm’s business activities, with the biggest increases expected to be reserved for?U.S. megabanks?with big trading businesses.?

I was fortunate to do another podcast this week. The episode should hit over the weekend but I really enjoyed my conversation with Randy Woodward and the host of the podcast, Jack Farley Forward Guidance (available on Apple, Spotify, all the usual Podcast sources) tackles many topics along high finance. Not just banking and lending but a broader set of issues (Artificial Intelligence, the Fed, Debt Ceiling, Stock Markets, Economics, etc). Our conversation swirled around many of the topics we regularly cover in these columns. The challenges facing depositories with rising cost of funds. The recent pull back in the extension of credit. Corners of lending markets that have some performance issues. Where the dark clouds might be forming. Who is winning and losing right now. It's an hour long, but if you're looking to hear the discussion - please give it a listen. I'll send out a formal posting when it hits the wires.

Enjoy the weekend! m22-218019