U.S.: Stricter financing standards for financial institutions
2022-11-17
■ Decline in demand for loans
■ Tighter lending criteria, awareness of deteriorating business environment and heightened uncertainty
The Federal Reserve (FRB) released its latest Senior Credit Officer Opinion Survey (SLOOS) on Nov. 7. For this survey, FRB conducted quarterly interviews with U.S. financial institutions about changes in lending standards and funding needs compared to three months ago, and responses were received on October 7.Accordingly, the DI of financing demand for large- and medium-sized companies (annual sales of US$50 million or more) (proportion of all responses with increased demand - proportion with decreased demand) was negative 8.8, a significant drop from the previous survey in July (positive 24.2) and falling into negative territory (excessive decline in demand). The majority of banks reporting weaker loan demand cited lower willingness to build inventory, lower investment in fixed assets, and reduced demand for M&A-related financing as reasons.
In addition, the financing benchmark DI (the ratio of strict to all responses - moderated) was positive 39.1, up sharply from the previous survey (positive 24.2). This is a step up from the previous survey, which showed a positive circle (over-strictening) for the first time in six quarters. Except for the peak of the new crown epidemic (January 2020 survey to July survey), this is the highest level since the January 2009 survey. Most of the banks that said they had tightened their lending standards and conditions cited the deteriorating business environment and increased uncertainty as reasons.The lending standard DI has been effective as a leading indicator of capital investment, industrial production and new employment, in addition to roughly confirming a 3-quarter lead for firms' operating margins. Earnings per share (EPS) for S&P 500 companies are expected to grow 5.9% in 2022 and 5.0% in 2023, compared to 7.7% at the beginning of October, according to financial information firm Refinitiv (as of 11). (7.8% increase). Although the market economy is deteriorating, the outlook for earnings per share is at risk of further deterioration if a recession becomes a reality, so caution should be exercised.
In addition, SLOOS was briefed on the likelihood and severity of a recession in the next 12 months, and changes in lending standards should a recession occur. Nearly 80% of financial institutions said the probability of recession is between 40% and 80%, and 20% of financial institutions believe the probability of recession is 80% or even more. Regarding severity, about 3% are mild (assuming a 0.6% reduction in real GDP in the coming year), more than 60% are mild (assuming a 1.1% year-over-year reduction), and less than 10% are considered severe (assuming a 3.4% year-over-year reduction). As can be seen, while recessions are predicted, there are various scenarios for the severity.