Traditional banking, the business of borrowing and lending, remains slow, and banks are receiving more deposits while lending books are not keeping pace. The reluctance to lend is partially driven by a decreasing margin between the borrowing rate and lending rate, the so-called Net Interest Margin. As an example, PNC Bank, whose debt SNWAM holds in many portfolios, reported a decrease to 3.12% from 3.58% the previous quarter. Intense competition between banks explains part of the spread compression. Tight lending standards, a holdover from the Great Recession, perhaps explains the rest. Banks are struggling to fill the void left by shrinking mortgage businesses, as both home-purchasing and refinancing volumes have fallen significantly since 2009. In order to maintain profit margins, Wells Fargo, Bank of America and Citigroup have each eliminated thousands of mortgage-related support jobs. However, mortgage rates have fallen this year, from 4.46% to 4.12%, along with the ten-year U.S. Treasury note, indicating a reversal may be developing. A loan officer survey conducted by the Federal Reserve suggests banks are lending more all around.
Broadly, the Fed survey shows banks have lowered lending criteria for consumers, small businesses and mortgage borrowers. “Credit standards for many types of loans, including mortgages, are still more stringent than they were before the 2008 financial crisis, but they've eased in recent months,” USA Today recently stated when providing background on the survey’s results. Some banks have been easing credit standards for small businesses since 2012, and, according to the New York Times, 20% of small-business loans were approved in June, up from 9% three years ago. This is still well below the pre-crisis peak of 36%, which may itself have been unsustainable. Almost 25% of banks surveyed by the Fed said demand for prime mortgages improved over the past three months, as they lowered the minimum credit score required to qualify for a mortgage, a reversal of repeated deterioration over the prior three quarters. Banks surveyed cited a more favorable economic outlook and added capital against which they may lend as reasons for increased activity. Thirty percent of banks reported higher demand from borrowers as an additional driver of lending.
We are broadly pleased with efforts to increase lending, especially in an environment of persistent job creation and real economic growth, where additional risk-taking may benefit banks’ stagnating top-lines. If loan books continue to grow, incremental economic growth may follow and corporate credit spreads may tighten even further.