Weak Pricing Puts Drag on Latest Index of Banking Activity

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Lending competition continues to weaken pricing while contributing to a slowdown in the banking industry's pace of expansion, according to the most-recent American Banker Index of Banking Activity.

The overall index reading for April was 57.5, indicative of ongoing industry expansion but at a pace shy of a month ago, when the index stood at 60.1. The March reading was the highest on record since the IBA's debut last July. (See the following graphic. Text continues below.)

Pricing remains weak, particularly interest rates for commercial loans, as respondents expressed concerns over competition. April's 35.8 reading for commercial pricing was the lowest since October. Consumer pricing was also weak in April, with a reading of 44.2.

Bankers were quick to play a blame game with pricing.

"Competition for loan demand is getting more and more aggressive with our competitors offering longer terms or much lower rates," a respondent said. Community banks participating in the government's Small Business Lending Fund are "more desperate to hit their … numbers so they do not fall under additional regulatory scrutiny."

Another banker lamented about "feeling the pricing pressures from the big banks' loan rates."

Respondents also reported slower growth in consumer loan applications (61.6) and approvals (59.1). In March, the readings were 66.7 and 65.2, respectively. The reading for commercial applications was essentially unchanged from March; approvals cooled slightly.

A number of events that took place in April could have influenced the pace of applications, including the Boston Marathon bombings, the Texas fertilizer explosion and full implementation of sequestration cuts.

"Uncertainty about regulation and taxation seems to be holding business and consumers back — except for housing, which has improved somewhat," one banker observed.

The IBA is a product of American Banker's monthly surveys of bank executives. The index is published in partnership with VantageScore Solutions. The latest installment was based on 276 responses.

Bankers' views of overall business conditions improved despite weak pricing and decelerated loan demand. The IBA's reading associated with market optimism hit 59.2, reaching the highest mark since the index debuted last June. March's reading was 57.1.

Bankers also indicated that they had reduced headcount in recent weeks. April's reading of 48.5 was a decline from the 51.1 reported a month earlier.

The IBA is a diffusion index. Readings above 50 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.

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.

Respondents are also asked to weigh in on 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 is representative of the industry on a number-of-institutions basis.

The values for individual components 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).

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