Index of Banking Activity Rises on Better Credit and Optimism

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Business activity in the banking sector improved significantly in September, rising for the fourth consecutive month, according to industry executives surveyed for American Banker's latest Index of Banking Activity.

The IBA's September overall reading of 55.4 compared to 53.9 in August. The IBA is a product of American Banker's regular surveys of bank executives and is published in partnership with VantageScore Solutions. The September index was based on 235 responses.

Credit quality – specifically lower loan delinquencies – provided the key spark to September’s overall index. The month’s reading for consumer delinquencies fell to 37 from 41.5 in August. Commercial loan delinquencies had a reading of 33, a notable improvement the 40 reported a month earlier.

The IBA is a diffusion index. Readings above 50 in the composite indicate a monthly expansion of activity and readings below 50 point to contraction. (For contrary indicators, such as the components that track loan delinquencies and loan-rejection rates, a reading above 50 is considered evidence of deterioration in business activity.) The further from 50 a reading is, the stronger the indicated change.

Another positive trend involved bankers’ views of business conditions within their markets. The reading for that component was 55 in September, up from 54 a month earlier. The reading for real estate conditions jumped to 61.4, compared with 56 in August.

A improved outlook could have also influenced the IBA’s lending components. Positive momentum returned in September, as respondents reported a decline in rejections of loan applications. There was a sizeable decrease in the reading for consumer loan rejections, which came in at 45 in September after reaching 50.7 in August. The reading for commercial loan rejections was 41, marking an improvement from 44 a month earlier.

Loan-application rates fell in September, reversing months of increases. The reading for consumer loan applications came in at a reading of 50.9, compared with 54.6 in August. Applications for commercial loans fell to a reading of 52.7 from 56.5 a month earlier.

Loan pricing, which has been a challenge for banks given artificially low interest rates and intensive competition for creditworthy borrowers, took a step backward in September. The 41.7 reading for consumer pricing slid from an already weak 43 in August. The same could be said for commercial loan prices; September’s reading of 37 was a setback from 38.7 a month earlier.

Deposit account activity was another positive. The component that tracks new checking accounts registered a 60.3 reading, rising slightly from August. Deposit pricing, a critical offset to low loan yields, worked in bankers’ favor. The deposit pricing component – a contrary indicator due to the cost of funds – came in at 33.6 compared with 40 in August.

The composite index is a simple average of readings on a range of indicators based on responses to survey questions on topics that include volume and pricing trends in commercial and consumer lending, loan balances outstanding, and deposit account activity.

Executives are also asked about staffing levels at their institutions, as well as business and real estate conditions in markets where they do business. Every effort is made to make sure that the breakdown of companies included in the executive panel are representative of the industry on a number-of-institution basis.

Values for each component of the index are equal to the percentage of responses indicating increased activity plus one-half of those indicating "no change." Component scores are then averaged to arrive at a composite (when calculating the composite, contrary indicators such as delinquencies are scored inversely — the component figure is subtracted from 100).

Monthly readings will be presented as a time series that can be used to monitor the prevailing rate and direction of change in banking business cycles and eventually to benchmark whether an institution is operating in line with overall industry trends. The next Index of Banking Activity, featuring data from the October survey, will be reported in late November.

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