The rapidly rising cost of deposits following prominent regional bank failures was by far the most commonly cited concern for chief financial officers, according to a new report.
Piper Sandler surveyed 82 bank CFOs in the wake of the
The failures were hastened by runs on the banks' deposits. This intensified competition for funding across the sector and compounded already elevated upward pressure on costs amid increasing interest rates. The
Another 16% surveyed by Piper Sandler said liquidity worried them most, followed by the 15% who noted increased regulation. Only 7% cited the potential for higher loan losses as their biggest source of apprehension.
"We were quite surprised that only 7% of the CFOs indicated that their greatest concern was asset quality," said Mark Fitzgibbon, Piper Sandler's research director. "Given how late we are in the economic cycle and the rapid move up in interest rates, we would have expected this to account for a much higher percentage of responses."
With the specter of recession looming large following 10 Federal Reserve rate hikes since spring 2022, the CFOs were asked if they saw early cracks in credit quality. Loan losses tend to mount during recessions, but 65% said they saw no signs of deterioration. Some 12% said they spotted some early issues in consumer lending and 10% were concerned about commercial real estate vulnerability. Another 2% cited construction loan weakness and 2% indicated that credit was beginning to deteriorate across all segments.
Fitzgibbon said that, while loan portfolios appear healthy overall, the fact that a third of finance chiefs were at least concerned about pockets of credit suggests some weakness lies ahead. "It sounds like we could see some softening" with second-quarter earnings, he said.
With the cost to fund loans rising and threats to credit quality increasing,
During the first quarter, community banks' collective loan growth rate fell to 1.3% from 3% in the previous quarter and 3.4% in the third quarter of 2022, according to S&P Global Market Intelligence data. Growth slowed across all loan types for banks under $10 billion of assets. Executives cautioned throughout the earnings season in April that lending activity was slowing further.
Old Second Bancorp, for one, increased its first-quarter loans 3.5% from the prior quarter. But James Eccher, chairman and CEO of the $5.9 billion-asset company, said that pace of growth "is not sustainable." He anticipates the Aurora, Illinois-based bank's loan portfolio will expand this year, but the rate of growth could get cut in half.
"I think if you step back and look at the macro environment, there's certainly recession fears out there," Eccher told analysts on the bank's first-quarter earnings call. "Our borrowers are being very cautious."
After hosting a bank conference in May, D.A. Davidson analysts said executives who spoke at the event reported loan pipelines were "down meaningfully, given reduced demand (on account of economic uncertainty and the impact of rising rates)," as well as more conservative underwriting.
"We suspect the latter stems from the increased cost to fund that growth — and likely tighter credit standards, including a number of banks citing a higher bar for putting new CRE loans on the books," the Davidson analysts said in a report.
