Business Optimism Lifts December's Index of Banking Activity

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Business activity in the banking sector expanded in December, as bankers expressed more optimism about business conditions.

American Banker's Index of Banking Activity stood at 56 in December, compared to 55.8 in November, finishing 2012 with five consecutive strong readings. The IBA is a product of American Banker's regular surveys of bank executives and is published in partnership with VantageScore Solutions.

The reading for in-market business conditions reached 56.6 in December, rebounding from a decline a month earlier. In-market real estate conditions also ticked up slightly, to 59.7. Lawmakers reached a compromise in early January to stave off the fiscal cliff.

"The economy strengthened in our local market, and we expended more efforts in marketing," responded a banker in central Illinois.

"Retail [activity is] up and we're getting more looks at new businesses," another respondent said. "Extremely low mortgage rates helped continue lending at a stronger pace than same month during the previous year."

Hiring cooled off considerably in December, with a reading of 49.1 compared to 52.1 in November. The reading in November had indicated accelerated staffing.

Consumer loan applications gained momentum, with December's reading of 54.5 marking the highest tally since August. The pace of approvals for those loans also heated up, with a 54.8 reading in December. Applications for commercial loans also accelerated, though approvals cooled off compared to a month earlier, marking the second straight quarterly decline in the approvals reading.

There was a glimmer of hope for commercial lending in the individual comments of the survey. One banker noted that there was a late year increase in applications from commercial borrowers, while another respondent was planning "for a significant increase in business loan volume" in 2013 compared to a year 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.

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 is 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).

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