The financial services industry is continuously evolving, and it is essential to optimize collections strategies to maintain liquidity and minimize risk. One of the most critical choices for credit un...
“May you live in interesting times” is said to be an ancient Chinese curse to wish upon one’s enemies. Between recovering from a global pandemic, soaring interest rates, the Russian invasion of Ukraine and economic sanctions from the West, oil surpassing $100 a barrel, and the cost of virtually everything rising, the U.S. economy has been living through interesting times in the first quarter of 2022.
Before joining SWBC as the SVP of Corporate Strategy and Chief Economist, I worked in senior leadership for over 14 years at the Federal Reserve Bank of Dallas. I like to put this experience to use by providing insights into the economic forces that are significantly impacting financial institutions today. I hope this information will help your institution guide discussions and implement strategies to support success in 2022 and beyond.
Loan Demand
Overall, expect loan demand to continue growing but at a much slower pace in the second half of 2022.
Mortgage Loan Demand
According to the Mortgage Bankers Association, demand for mortgage loans has already decreased by nearly 40% from 2021 highs thanks to a jump in rates and higher prices. Expect this trend to continue, but not worsen as much of the Fed’s anticipated rate hikes have already been baked into mortgage rates.
Despite a slowdown in demand, home prices should still go up 7-10% this year due to still tight supply and a large percentage of “cash” purchases. This, in turn, should prevent any downturn in home prices or potential negative equity situations.
Commercial Real Estate (CRE) Loan Demand
Demand for CRE loans should continue to be solid, particularly for industrial and multifamily. Retail will be positive but slower in the second half of the year as inflation continues to impact consumer spending.
Demand for office space will be location-specific but should see some slowdown as labor constraints will impact demand for additional space. As interest rates move up, demand will inevitably be impacted as many commercial real estate projects may not make economic sense at higher rates.
Auto Loan Demand
Demand for auto loans should continue to be strong. A combination of supply shortages and less mobility during the pandemic has pent up demand for vehicles. As supply chains improve and high fuel prices generate a need for newer more efficient autos, demand for new autos will definitely go up.
Used car loan demand may soften due to higher fuel prices and uncertainty with pricing as new car inventories build back up. As we predicted in our first-quarter outlook, used car prices have started to decline from unsustainable levels. We expect this trend to continue and advise caution on lending in this space.
Loan-to-value (LTV) ratios will have to be carefully monitored to protect against faster depreciation as the market continues to correct.
Consumer Credit
Consumer credit continues to grow. Negative real wages have caused a recent spike in demand and usage of consumer credit. Additionally, savings from government stimulus during the pandemic have largely worn off, leaving consumers with little option to keep their spending in place. Recent increases in consumer debt have been the largest in a decade.
Margins
While margins are expected to remain somewhat tight this year due to competition and a lot of liquidity in the financial system, the recent steepening in the yield curve bodes well for net interest margins. Unfortunately, a cool down in loan demand may offset some of the potential revenue gains.
Delinquencies
Expect delinquencies to increase in the second half of the year for mortgage, consumer, and auto loans. The combination of negative real wages, rising interest rates, declining savings and increases in consumer debt will inevitably lead to higher late payments, repossessions, and foreclosures.
In particular, watch for a decline in used auto loan valuations leading to more borrowers being upside down for longer and an increase in repossessions. To this point, JP Morgan Chase announced an increase to their loan loss reserves anticipating deterioration in their loan portfolio.
Labor Supply
Already a major concern for every financial institution, expect tighter and tighter labor markets for years to come.
Financial institutions will need to continue investing considerably in automation and the use of data analytics to make the staff they have more efficient and productive.
Additionally, outsourcing (both onshore and offshore) will become more attractive for human capital-intensive operations like call centers, information technology development, and customer service.
Deposits
Bank deposits have already flattened out after their strong run-up, thanks to government stimulus in 2020 and 2021. Expect this trend to continue and, if anything, some shrinkage as consumers struggle with the effects of negative real wages.
Savings Rates
Savings rates are now at the lowest levels since 2013 reflecting the toll inflation is having on consumer balance sheets.
Conclusion
With the economy downshifting into a slower, more normalized growth pattern, financial institutions will need to adjust as well. As loan demand naturally softens off record 2020 and 2021 levels, financial institutions need to look for alternative sources of revenue from fees and other non-interest income. Additionally, look for ways to reduce labor expenses through automation and outsourcing and consider stepping up risk management efforts as the expected rise in delinquencies comes to pass.
Let Us Know What You Thought about this Post.
Put your Comment Below.