“While there’s a slight improvement in the economic indicators, the overall consensus is a slow recovery, at least for the first quarter of 2010,” says Gene Truono, managing director with BDO Consulting, a division of BDO Seidman LLP. “Based on that premise, credit will remain tight in both the consumer and commercial markets due to concerns about losses and current underwriting standards, which will remain prudent.”
That is, there’s more of the same ahead, at least for a while. In September 2009, the most recent month for which numbers are available, loan originations totaled $239 billion among the 22 largest institutions to accept TARP money, according to the U.S. Department of the Treasury. That compares with a monthly average in the previous six months—not known as a terrific time for lending—of $279 billion.
Overall, according to the Federal Reserve, U.S. bank lending to businesses declined to $1.35 trillion in 2009, down about 17 percent from 2008. Banks are hacking away at consumer lending, too. For example, New York-based JP Morgan Chase cut customers’ credit-card lines by 6.3 percent in the first nine months of 2009, and mercilessly slashed home-equity lines by 32 percent during the same period.
Moreover, now that some of the largest banks are repaying TARP, federal policymakers up to and including President Obama will lose some of the already scant leverage they had in persuading banks to lend. In December, the president jawboned in the direction of bank CEOs, urging them to undertake a number of steps to get capital flowing more vigorously, including making more loans to small- and medium-sized businesses.
The bankers listened politely, but it was hardly clear that they will do any such thing in 2010. As an industry, they point out that other parts of the federal government—namely, regulators —are still squeezing banks tightly when it comes to the question of capital reserves. Bankers also argue that they’re merely being prudent in the face of losses that haven’t fully worked their way through their balance sheets. Back in mid-2009, after all, the “stress tests” of the 19 largest banks estimated that their total losses might be as much as $600 billion by the end of 2010.
It’s conceivable that the Federal Reserve could increase the interest rate that banks charge each other as a stratagem to promote renewed lending. With the rate currently at nearly zero, there’s little incentive for lenders to lend money that can be invested in Treasures or other low-risk instruments. Yet higher interest rates aren’t on the table for the foreseeable future. At its final meeting of 2009 in mid-December, the Fed declined to raise rates or assert that they needed to be raised anytime soon.
“After something like the plunge in late 2008 and early 2009, lenders simply aren’t going back to the way lending used to be in the mid-2000s,” says Bruce McCain, chief investment strategist at Key Private Bank, an affiliate of KeyCorp (which received $2.5 billion in TARP funding). “And no one is saying they should, because it’s generally agreed that standards were far too lax. The question now is how far the pendulum needs to swing back from the overcautious days we saw last year. No one is quite sure about that yet.”
Still, McCain adds that there are some hopeful signs. “It’s fair to say that the credit markets have stabilized, and spreads are back to normal as well,” he says. “Though there’s a rationing of credit, that doesn’t mean that it’s impossible. Clients with solid, longstanding relationships with their banks are in the best position to take advantage of the credit that is available.”
Two factors will determine the future of capital requirements and availability, posits Truono. “First will be the outcome of ongoing credit agency adequacy reports for specific banks,” he says. “Second will be the outcome of the regulatory reform requirements for capital standards. Both of these factors are tied to the economy, which at best shows only slightly modest improvement for 2010 based on increasing losses and charge-offs.”
The losses and charge-offs promise to be particularly steep when it comes to commercial real estate, the problem child of lenders these days. The commercial real estate outlook isn’t favorable for 2010 after the plunge in property valuation between 4Q08 and 4Q09 (as estimated by Moody’s) of an average of about 30 percent.
One of the former sources of real estate capital, securitization, isn’t likely to make a roaring comeback in 2010, or even a simpering one, says McCain—part of a larger reluctance to create new asset-backed securities. This reluctance is for entirely sound economic reasons. Late in 2009, Fitch reported that it expected asset-backed collateral performance to continue to slide this year, mainly because of persistent high unemployment rates. Credit card charge-off rates, for example, will be about 12 percent.
According to the Mortgage Bankers Association, delinquencies along commercial real estate loans in conduit structures stood at 4.47 percent at the end of November 2009, up 46 basis points from only the month before. The organization estimates that the rate will rise to about 6 percent by the end of 1Q10, and perhaps twice that by the end of 2012.
In short, it’ll be a long, hard slog for asset-backed finance. “The asset-backed securities market will come back eventually,” McCain predicts. “But it’s going to be a slow process, slower than the recovery of the economy itself. Too many people were burned—are being burned—too badly for it to be otherwise.”
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