Let's Talk Loans - Vol. 90

Welcome back to another week of Let's Talk Loans. If you're looking to dive deeper into the world of banking and lending, you've come to the right place. I hope you enjoy the content and please share / subscribe with a peer!

For the pivot hopeful, this was another absolutely ruthless week. The CPI number that came out on Tuesday may have wiped out not one but two cuts for this year. We are again hearing rumblings from some economists that the next move might be a HIKE, not a cut. While still a low probability, the fact that the word is again on our lips is concerning.

The concern is that the fight on inflation is not dead or worse, could be reigniting. January's number was a worry, but the talk track was it was just one hot month and one month does not make a trend. Then February happened. Now you're looking at a full quarters worth of data and inflation is not retreating as fast as many hoped. The market is starting to absorb the probability that it might just be 1 or 2 cuts this year - and possibly none.

With this news on what seems to be more sticky service inflation, and the probability of even fewer cuts on the horizon, rates popped this week. Last Thursday (4th), the 10 year was 4.30%. It reached 4.58% this Thursday. The 2 year made a similar move. Last Thursday (4th) you had a 4.65% 2 year. On Thursday (11th) we flirted again with 5% when it reached 4.96%. Recent highs back in October (5.22% / 4.98%) appear to be closer to reality even though we entered 2024 with the hope of falling rates. This is creeping its way into loan coupons. We saw the 30 year mortgage rate climb back above 7% on Wednesday per the MBA . With the short end of the curve spiking, I would expect auto rates to tick back up also. This also helps those clients who pushed into HELOCs. Indexed to Prime, fewer cuts mean higher HELOC rates for longer.

Shifting over to banking. It's earnings week . Nathan Stovall put out his take on the banking sector for 2024 and beyond. Grabbing a few talking points from this article. With higher for longer you have a double-edged sword. Loan rates are already high and loan volumes are struggling under the weight of those higher rates. Deposit costs are catching up. Provisions are catching up. Depositories are now looking to cut expenses and improve efficiency ratios to make up the gap but that will take time to see those cost savings work through the numbers.

The good and bad news to this resilient economy is that lenders continue to have time to pad provisions to work through these problem assets. There has been no shock to the system causing forced sellers. However, the maturity wall in CRE lending will be a slow-moving train wreck. Losses are now being taken as lenders pick through the winners and losers in their maturing / repricing portfolio. There have been several headlines of late where loans are being charged off at only the value of the dirt. Higher rates for longer will continue to put pressure on these assets as they get little relief from the Fed.

I haven't studied all the earnings reports in detail but the below headline on JPM and Wells did catch my eye. Many of you who read this are a fair bit smaller in asset size than either institution (sarcasm included). As we talk on calls with our clients, I've felt some optimism of late in the lack of deposit outflows. That seems to have stabilized and is the good news. We've seen depositories pick up their interest in putting on more loans with the threat of recession being pushed further away and at attractive yields. The below reality is that deposit costs are climbing. Loan coupons rose more quickly than the deposit costs and that is what drove some impressive quarters. If the great JPM is starting to feel this, breaking an 11 quarter streak, will this be trickling down to smaller institutions soon, if not already? As a reminder, net interest income is the difference between what banks earn on loans and bonds after its cost of deposits.

"Wells Fargo attributed the decline in first-quarter NII to the impact of higher interest rates on funding costs, including customers moving their money to higher-yielding accounts, as well as lower loan balances."

A quick public service announcement - next week we have our Whole Loan Market Update call. We go through all the various loan products on this call: mortgages, commercial real estate, autos, HELOCs, unsecured, Fintech, credit cards and more. We tackle many of the topics surrounding banking that you read here. If you are looking for a broad discussion as to what’s trending or trading in loan land, this is a 45 minute discussion you should tune into. Reach out to your Raymond James sales rep for an invitation. This is for institutional customers only.

Have a great weekend! M24-469757