Let's Talk Loans - Vol. 63

First up, thank you. I reached 12,000 followers this week. This newsletter now has more than 5,500 subscribers. A few years ago, LinkedIn was an experiment for me to get loan commentary out to customers more efficiently. It appears to be working! I thank you for the ongoing feedback and discussions. For those of you first time readers, the goal here is chat about what's working for depositories and discussions that pop up on the loan desk here at Raymond James. I hope you find it useful.

The Federal Reserve Bank of New York released its Household Debt numbers yesterday. We hit another new record as it comes to debt outstanding, up ever so slightly from last quarters record, to $17.06 trillion.

Looking at the growth. Mortgages prepayments have slowed, keeping existing balances high, and new production remains low. This is essentially keeping the mortgage market flat - net net. It remains a tough market for mortgages. Credit cards are surging, a record high of $1.03 trillion. Up nearly 5% QoQ. Auto lending continues to show strong growth. Autos are not nearly as impacted by the slow prepayment woes that mortgage is experiencing. Overall, balances up 20bn on 179bn of originations. Note HELOCs - the smallest consumer market in overall size - are growing again. This is directly related to the ultra-low mortgage rates and a space I continue to see growth in for the coming quarters.

Looking at credit, performance continues to "normalize." Specifically in cards and autos we continue to hear of softening.

"The share of debt newly transitioning into delinquency increased for credit cards and auto loans, with increases in transition rates of 0.7 and 0.4% respectively."

"Compared to other debt categories this quarter, credit card balances saw the most pronounced worsening in performance."

Q2 numbers. Looking specifically at credit unions . Loan growth was up, but slowing. From 6.5%, down to 3.4%. That's largely due to the liability side of the balance sheet and this headline is a growing challenge for credit unions.

"Total shares and deposits contracted at US credit unions representing the most severe decline in nearly 15 years."

Charge offs ticked up slightly, 2bps, though well off historical highs from 2009.

Moving over to banks . Similar story to their credit union brethren. Loan growth has ground to a halt, up ever so slightly to 0.7%. Securities on the decline, down 3.1%. Cash, down 21.9% from its peak in Q3 '21, and down nearly 6% QoQ.

"Total assets were lower for the fourth time in the last five quarters and have declined more than $500 billion from the peak at March 31, 2022."

Studying those challenges we keep talking about as they work their way into the income statement. While the year over year numbers are showing the positive side rising interest rates, the quarter over quarter numbers are starting to show the negative side to funding pressures. Noninterest income took it on the chin. Provisions are up 14%. Net income down nearly 11%. Brokered deposits up 17%. None of this is good for margins. ROA / ROE both down. Good news is credit remains strong, with only minor upticks.

Moving over to Fed speak and rates, the CPI and PPI numbers came in this week . The good news is that inflation is slowing. The bad news is that it is not behind us. CPI year over year came in at 3.2%, up 0.2% from June's 3.0%. Core inflation, arguably the more Fed watched figured, ticked down slightly to 4.7% in July from June's to 4.8%. This news spurs hope that the September meeting will have another "pause" or "skip" in store for us. Both the Boston and Philadelphia Fed presidents made statements that a pause might be appropriate.

Trying to find some good news in the numbers. From the Financial Times , while year over year inflation still has some outside pain points, the month over month numbers are more encouraging. Could we truly be coming to the end of the onslaught? Shelter makes up the majority of current increase in inflation. So while core inflation has been stubbornly high, the question remains if it slow fast enough to give Powell a chance to end the hikes. Along those lines - the 10 year is at 4.15% as of this typing - just 10bps away from the Oct 24th recent high.

Specifically regarding that shelter number, comments that we could be seeing relief here in the near future.

“Though shelter inflation is sticky, the CPI lags market rents by roughly a year. Therefore, we know that the CPI for shelter is set to moderate noticeably through the remainder of this year,” said Ryan Sweet, chief US economist at Oxford Economics."

The San Francisco Fed echoes the argument this week in their recent study.

"Our baseline forecast suggests that year-over-year shelter inflation will continue to slow through late 2024 and may even turn negative by mid-2024."

I hope that the San Francisco Fed's forecast come true.

Lastly, it's conference season. Will be in Louisville, Kentucky next week for while speaking at NAFCU Risk . If you're attending this conference, please reach out!

# NAFCURiskSeminar #linkedinfinance

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