Two weeks after we reported that the consumer credit card default rate as tracked by S&P/Experian Bankcard had surged to the highest level since June 2013...

... we were looking forward to the latest Fed Senior Loan officer survey for more details about changing loan dynamics within US society.

What the report revealed was troubling: while on the surface, the Loan Officer Survey characterized loans to businesses as "basically unchanged" from the previous survey, it did remark that standards for commercial real estate (CRE) loans had tightened.

According to the report, "banks reported tightening most credit policies on Commercial Real Estate loans over the past year.... On balance, banks reported weaker demand for CRE loans in the first quarter."

More concering was the continued drop in demand for C&I loans among small, medium and large corporations, with "inquiries for C&I lines of credit remained basically unchanged" staying at a modestly depressed rate.

This helps explain, once and for all, the recent collapse in Y/Y commercial bank loan creation, both total and C&I, and indicated that contrary to Goldman's take, the steep drop has nothing to do with calendarization or a base effect, and everything to do with declining demand for the product among America's businesses, a concerning deterioration in an economy that is reportedly improving, and where companies would be willing to take out new credit to fund expansion.

Digging deeper revealed an even more distressing picture as a result of a sharp consumer revulsion toward credit, with reduced level of consumer card and auto loan demand in the quarter. The decline took place despite "visibly softer" underwriting standards for cards which surprised some analysts as not creating incremental demand;

Worse, demand for credit cards is now running at the lowest level in the 5 years the survey has provided credit- card-only data for consumer demand.

The report included special questions regarding commercial real estate lending conditions. Tighter credit policies for most CRE loans were the result of "a less favorable or more uncertain outlook for CRE property prices, vacancy rates or other fundamentals on CRE properties, and capitalization rates, as well as reduced tolerance for risk. Significant net shares of banks also reported less aggressive competition from other banks or nonbank financial institutions and increased concerns about the effects of regulatory changes or supervisory actions as important reasons for tightening CRE credit policies." (Emphasis added.)

Additionally, lending for residential real estate reflected little change in standards or demand by consumers. There was also little change to standards or demand for home equity lines of credit. Auto lending standards tightened. It is likely that concerns about the quality of auto loans may be driving some of the more restrictive conditions for lending. For credit card loans, there was some easing of standards and terms were "basically unchanged".

According to Stone McCarthy the contraction in the retail sector has had some impact here as several chains have significantly reduced or eliminated their brick-and-motor presence.

Not surprisingly, as demand for credit bumbled, banks' willingness to lend improved to 10.8 in April after slipping to 3.1 in January.



Finally here are excerpts from several sellside reports, all of which we unpleasantly surprised by the report, courtesy of Bloomberg.

WELLS FARGO (Matthew Burnell)

Primary takeaway remains reduced level of consumer card, auto demand vs 3Q after visible drop in 1Q (published in Jan., responses provided in Dec.)

Notes "visibly softer" underwriting standards for cards aren’t creating demand; demand now running at lowest level in the 5 years the survey has provided credit- card-only data for consumer demand

Standards across most other loan products were largely stable, though demand for commercial loan and commercial real estate dropped slightly from prior survey and mortgage demand ticked slightly higher (thanks to lower mortgage rates)

JPMORGAN (Daniel Silver)

Survey was "a mixed bag," with weakening demand for many key series but also easing in lending standards for some major lending categories

Easing C&I lending standards may be most important takeaway, even as demand declined

BARCLAYS (Jason Goldberg)

Loan demand across all lending segments generally softened during 1Q, with C&I demand modestly weaker (though inquiries for C&I lines of credit was unchanged); CRE (broad-based), credit card, auto also weaker

Key reasons included decreases in customers’ investment in plant or equipment and decreases in M&A financing needs

Tighter lending standards could foreshadow CRE (particularly C&D and multifamily), auto credit quality deterioration; regulators still focused on CRE

Lists banks most exposed to auto loans: ALLY followed by COF, HBAN, CFG, FITB, while COF, C, JPM, BAC have largest credit card concentration (all >10% of loans); JPM, MTB, COF, KEY have largest multi- family exposure (though all

EVERCORE ISI (John Pancari)

Survey shows "tempered tone" around growth, largely reinforcing themes observed in recent results, including sluggish demand and credit tightening

Notes little change in level of inquiries for C&I lines contrasts with 1Q bank mgmt comments mentioning pickup in borrower optimism, new line openings

SUSQUEHANNA (Jack Micenko)