Fed’s Senior Loan Officer survey: C&I loan standards largely unchanged

By Marisa Wong

Morgantown, W.Va., Feb. 6 – Banks overall left their standards on commercial and industrial loans mostly unchanged in the fourth quarter of 2016, according to the Federal Reserve Board’s January 2017 Senior Loan Officer Opinion Survey on Bank Lending Practices.

The survey received responses from 70 domestic banks and 23 U.S. branches and agencies of foreign banks.

Domestic banks reportedly left commercial and industrial lending standards for large and middle-market firms and for small firms unchanged.

Changes to terms on commercial and industrial loans for large and middle-market firms were mixed. Specifically, a moderate net percentage of banks reportedly increased the maximum size of credit lines, while a modest net percentage of banks reportedly eased loan covenants, reduced the cost of credit lines and narrowed spreads of loan rates over their cost of funds. The remaining terms surveyed remained basically unchanged.

Banks also reported that changes in the terms of loans to small firms were mixed. Specifically, a modest net percentage of banks reported increasing the maximum size of credit lines and narrowing spreads of loan rates over their cost of funds, while the remaining terms surveyed remained basically unchanged.

Most domestic banks that reportedly tightened either standards or terms on commercial and industrial loans over the past three months cited a less favorable or a more uncertain economic outlook as an important reason. Significant fractions of those respondents also cited deterioration in their current or expected capital positions; worsening of industry-specific problems; reduced tolerance for risk; decreased liquidity in the secondary market for these loans; deterioration in their current or expected liquidity positions; and increased concerns about the effects of legislative changes, supervisory actions or changes in accounting standards.

Most domestic banks that reported having eased either their standards or terms on C&I loans over the past three months cited more aggressive competition from other banks or nonbank lenders as an important reason. Significant fractions of such banks also cited increased tolerance for risk and a more favorable or less uncertain economic outlook as important reasons.

Banks reported that demand for commercial and industrial loans from large and middle-market firms, alongside small firms, did not change much. Meanwhile, a moderate net fraction of banks reported that inquiries for commercial and industrial lines of credit had increased.

Most domestic banks that reported stronger commercial and industrial loan demand cited as important reasons increases in customers’ investment in plant or equipment and increases in customers’ merger or acquisition financing needs. On the other hand, most banks that reported weaker demand said the following were important reasons: decreases in customers’ investment in plant or equipment, decreases in customers’ accounts receivable financing needs, increases in customers’ internally generated funds and decreases in customers’ merger and acquisition financing needs.

Meanwhile, foreign banks also reported that commercial and industrial lending standards and terms surveyed remained more or less unchanged in the fourth quarter. A moderate net fraction of foreign banks reported experiencing weaker demand for loans, while the number of inquiries from potential business borrowers regarding lines of credit reportedly remained basically unchanged.

In addition, the survey included special questions addressing banks’ outlook for lending policies and loan performance – as measured by loan charge-offs and delinquencies – over 2017.

Generally, banks reported that they expect to ease standards on commercial and industrial loans and for the asset quality of those loans to improve somewhat this year.

© 2015 Prospect News.
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