Momentum in the banking industry is starting to slow as demand for commercial loans cools.
The American Banker Index of Banking Activity fell to 54.6 in November from 55 a month earlier, marking its fifth straight monthly decline. It was the worst monthly showing for the index which measures bankers' impressions of banking conditions since January.
Driving the decrease was a drop in commercial loan applications. The index for commercial loan activity fell to 49.7 in November from 56.5 in October and 56 in November of 2013. The lowest previous reading was 53 in July 2012, a month after the index was launched.
The weakening loan demand was a hot topic of discussion at a conference hosted by Goldman Sachs in early December. Tayfun Tuzun, the chief financial officer at Fifth Third Bancorp in Cincinnati, attributed the late-year swoon to a slowdown in small-business loan applications.
"We've seen a decline in the smaller customer segments," he said.
Businesses also tend to monitor spending and borrowing and they start budgeting for a new year, others said.
"During the holiday season things tend to slow down... as you reach the end of the year when people have to sort of get their books set for the turn of the year," Bryan Jordan, chairman and chief executive of First Horizon National in Memphis, Tenn., said during his presentation.
It is unclear what role, if any, declining oil prices will have on commercial activity. Few respondents for the November index specifically addressed the issue, though a number of participants expressed optimism that lower gas costs could boost consumer spending.
Several bankers echoed that sentiment during the Goldman conference.
"The reality is that the benefit for the rest of the U.S. is actually bigger than the offset" in parts of the country reliant on oil production, Brian Moynihan, chairman and chief executive at Bank of America, said. He said one area of improvement could be credit quality.
"I would say net-net this is a good thing for the country," Wells Fargo Chairman and CEO John Stumpf said at the same conference.
Interestingly, commercial loans approvals continued to increase, but at a slower rate. The reading for approvals was 53.2 for November, down from 56.4 in October and 57 a year earlier. Some respondents expressed optimism that the quality of applicants was improving even if the quantity had fallen.
Consumer loan growth continued to decline; a seasonal slowdown in home buying was likely a big reason why. The reading for consumer applications fell to 51.4 from 54 a month earlier, while the tally for approvals slid to 53.2 from 56.4.
Index of Banking Activity readings above 50 indicate monthly expansion; 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 evidence of deteriorating business activity. The further from 50 a reading is, the stronger the indicated change.
Loan pricing remains a challenge for bankers. The readings for consumer pricing (48.3) and commercial pricing (47.8) revealed that lenders are continuing to keep rates low in order to lure the most creditworthy borrowers.
Bankers, however, have finally been able to control what they pay for deposits. The reading for consumer and commercial deposit pricing was 47.8 in November, compared to 49.8 in October. It is the first time since the index was launched in June 2012 that the reading for deposit pricing came in below 50 in consecutive months.
Bank staffing levels continue to improve. The reading for hiring rose to 56.2 in November from 54.7 in October, showing increased activity for the seventh straight month. Bankers remain relatively optimistic about the economy; the reading for business conditions improved to 58.5 from 57.6 a month earlier.
The IBA is a product of American Banker's monthly surveys of bank executives. The latest installment of the diffusion index was based on 271 responses.
The IBA's 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 ensure that the breakdown of companies included in the executive panel is representative of the industry.
The values for individual components of the index are equal to the percentage of responses indicating increased activity plus 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.