Bottom Line Upfront:
Hey there! Quick update on what’s happening in U.S. banking and commercial real estate (CRE) lending as we round out 2023. Here’s the deal: big banks are treading cautiously, stashing more cash than ever, while smaller banks are still keen on lending. This split approach is pretty telling about the current state of our economy. On the CRE front, things are looking like they might be getting back to normal, but we’re not quite there yet. It’s more like we’re on the path to stabilization, but there are still a bunch of hurdles to clear. So, for you investors out there, this scenario of cautious big banks, eager small banks, and a CRE lending market that’s finding its footing opens up some intriguing opportunities. Stick with me, and let’s unpack the US banking and CRE lending trends in 2023 to see what it means for your next big investment move!
As 2023 winds down, the U.S. banking sector is giving us some mixed signals. It’s a bit like watching a game where one team is playing defense and the other’s all about offense. Big banks are holding onto their cash like it’s a precious commodity, while smaller banks are handing out loans like flyers. This divergence is more than a financial trend; it speaks volumes about our broader economic landscape.
Banking Industry’s Current State:
Let’s break down the numbers: U.S. banks, particularly the domestic ones, have upped their loan game, but only just. We’re talking about a 0.7% increase in loans, reaching $11.165 trillion. It’s not exactly a growth spurt, but it’s something. But why the timid growth? Well, it’s all about those rising interest rates. They’re making folks think twice about borrowing and the banks? They’re tightening the reins to avoid risky business.
Deposit on the Rise… But Not Really:
Here’s an interesting bit: while loans are inching up, deposits are doing a bit of a balancing act. They’ve gone up by 0.3%, hitting $16.087 trillion. But the catch is in the details – a significant chunk of this increase comes from large time deposits. It’s like more people are choosing to park their money for longer periods, maybe waiting out the economic uncertainty.
Securities, Assets, and the Cash Game:
Banks aren’t just sitting on cash; they’re also letting their securities investments slide a bit, by about 2.3%. But their overall assets? They’re nudging up, by 0.4%. It’s a cautious strategy, keeping enough cash handy in case things go south. This balance between maintaining liquidity and adjusting investment portfolios is a key aspect of how banks are navigating the current economic landscape. For more detailed insights into these trends, you can read the full report from S&P Global Market Intelligence here.
To me, this behavior signals that banks are bracing for potential economic headwinds and uncertainty as we head into 2024. By holding onto more cash, they’re preparing for scenarios where they might need to cover unexpected withdrawals or loans turning sour. This conservative stance can affect everything from the interest rates on savings accounts to the availability of credit for businesses and consumers. Essentially, when banks play it safe, it often translates to tighter financial conditions for the broader economy. It’s like a ripple effect – banks being cautious could lead to businesses and individuals finding it harder to get loans or facing higher costs for borrowing. This dynamic is particularly important for anyone eyeing the real estate market or looking to finance large purchases.
Credit Cards and Borrowing:
In the midst of all this, there’s a plot twist: credit card lending. Unlike other loans, credit card numbers have swelled by 2.4%, crossing the $1 trillion mark. It’s like while the big loans are on a slow burn, people are still swiping away on the smaller stuff.
What’s Up with CRE Lending?
Switching gears to CRE lending, it’s a bit like watching clouds clear after a storm – things might be settling, but it’s not all sunshine yet. The CRE lending market is trying to find its feet. CBRE’s Lending Momentum Index, a kind of speedometer for CRE loan closings, shows a 3% dip from the last quarter. It tells us that while things are moving, it’s at a slower pace.
This slowdown can partly be attributed to systemic risks, which is market-wide uncertainty that affects all investments and cannot be lessened by diversification. Key among these risks are inflation and the current economic landscape of high-interest rates and limited supply. Inflation challenges the market by diminishing purchasing power and altering investment strategies. Meanwhile, high-interest rates, a tool to combat inflation, increase the cost of borrowing. This affects real estate investors and developers by making financing more costly and potentially slowing down new projects.
Furthermore, the lack of supply in crucial real estate segments makes these issues even worse. These economic conditions create a tough environment for CRE lending. Borrowers are squeezed by rising costs, impacting their ability to finance new purchases or refinance existing loans (that’s scary stuff for upcoming loan maturities in the commercial mortgage-backed securities market). Lenders face the dual challenge of managing these risks while making prudent lending decisions, often leading to stricter underwriting standards. This cautious stance contributes to the market’s slowdown, as reflected in the CBRE Lending Momentum Index.
As I said, the clouds may be clearing, but the horizon still looks threatening. More to follow.
Big and Small Banks – Different Strokes:
As we delve deeper into the banking sector’s dynamics, a clear contrast emerges between small and large banks. According to Steven Blitz, chief U.S. economist, and managing director of global macro for TS Lombard, “Since March, the ratio of large deposits to totals have been growing, ‘from just under 10% of total deposits in March to over 12% and loans are rising relative to cash and UST [U.S. Treasurys].'” This trend suggests that small banks have been ramping up their lending activities, in stark contrast to their larger counterparts. While larger banks are adopting a more cautious stance, increasing their cash reserves, small banks are actively growing their loan portfolios. For a deeper insight into this trend, check out the article by Erik Sherman on GlobeSt.com here.
Opportunities in the Mix:
For investors, this divergence between big and small banks opens up a range of opportunities. With the US banking and CRE lending trends in 2023 showing signs of gradual stabilization, and big banks holding back on lending, small banks’ active lending strategies create gaps in the market. Identifying and capitalizing on these gaps could be key for savvy investors looking to make the most of the current financial landscape.
So, what does all this mean for you? Whether you’re a borrower, an investor, or just someone keeping an eye on the economy, US banking and CRE lending trends in 2023 are painting a picture of cautious optimism (I always enjoy saying that phrase). There’s potential out there, but it’s wrapped in a layer of caution. As we navigate these interesting financial times, we’ll do our best to help keep you informed and agile.
Stay frosty out there – opportunity is abundant for those who are willing to get creative and make informed, strategic decisions in this constantly evolving financial environment.