The Senior Loan Officer Survey results indicate that banks continue to maintain a favorable lending environment. Over the past three months, banks continue to ease loan underwriting standards for commercial and industrial loans during the fourth quarter (see Chart 1).
There is a small improvement in the demand for commercial and industrial loans (see Chart 2) from large and medium firms and small firms, with large firms showing the larger gain.
There was no change in standards on commercial real estate loans in the fourth quarter, but there was an increase in demand for commercial real estate loans, the strongest reading since 2006 (see Chart 3).
But terms were tightened on commercial real estate loans. Roughly 40% of domestic banks indicated they have tightened loan-to-value ratios, fewer banks had tightened debt service coverage ratios and loan sizes.
In the residential sector, prime real estate loans were not affected but banks tightened standards for nontraditional mortgage loans.
Demand for residential real estate loans had weakened in the three months ended December (see Chart 5). Bankers were also asked if they expect their residential real estate holdings to increase over the first six months of 2011. Approximately 35% indicated that residential real estate holdings would move up in this period.
Bankers were also asked about their outlook for delinquencies and charge-offs for different loan categories in 2011. This is a special question that has featured once during the past five years. In the latest survey, banks were more optimistic compared with prior years. "Moderate to large net fractions of banks reported that they expected improvements in delinquency and charge-off rates during 2011 in every major loan category." The details indicate a larger percentage of improvement was expected in the commercial and industrial loan sector vs. residential and consumer loans.
With regard to consumer loans, bankers reported no change with regard to non-credit-card loans but a small net fraction had tightened lending standards for credit card loans (see Chart 6).
The net number of bankers indicating an increase in the demand for consumer loans turned positive for the first-time since third quarter of 2005 (see Chart 7).
Strong Consumer Spending in December, Inflation Contained
Real personal consumption expenditures increased 0.4% in December after a 0.2% increase in the prior month. The gain came largely from durable goods (+1.0%), while non-durables (+0.3%) and services (+0.3%) posted moderate increases.
Personal income moved up 0.4% in December and personal saving as a percentage of disposable income was 5.3% in December, with the annual average at 5.8% (5.9% in 2009). The saving rates recorded in 2009 and 2010 are the highest since the early-1990s (see Chart 9). Essentially, households are taking the old fashioned route to raise their net worth after the setback suffered from declines in house and equity prices.
Personal consumption expenditure price index (+0.3%) and the core personal consumption expenditure price index (0.0%), which excludes food and energy, continue to show a tame inflationary picture. The year-to-year change in the core personal consumption expenditure price index (+0.7%) is the lowest on record (see Chart 10). These favorable inflation readings bolster the Fed's case for the focus on growth in the inflation-growth debate.
The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.
