The US Federal Reserve’s latest consumer lending survey responses signaled that banks remain positive on consumer lending, despite expectations that the central bank will raise overnight lending rates at least two more times in 2018.
Consumer lending in the US totals more than US$3.8 trillion, with average gross interest rates of 14-15% and default rates below 4% according to fourth quarter data from the St Louis Fed.
According to the Fed April 2018 Senior Loan Officer Opinion Survey, US banks indicated that they continue to be willing to make consumer loans, even as standards for auto loans and credit cards faced modest tightening.
90.8% of the banks reported their willingness to make consumer installment loans remained unchanged, while 7.7% said that they were “somewhat more willing” to do so.
“The Consumer Lending Survey is an attestation that banks’ credit officers continue to have confidence funding profitable consumer loans, even in the rising interest rate environment. This is a result of the joint strength of household repayment ability and the strong US labor market.” Maggie Ng, CEO of FinEX Asia, explained.
The quarterly survey, which compiled the responses from 72 domestic banks and 22 US branches or agencies of foreign banks, addressed the demand for and changes in the banks’ standards for loans to businesses and households over the past three months. The survey helps the US Fed to take the pulse on the latest credit outlook of US consumer lending from banks’ credit officers, as they are experts in this area and at the front lines of credit risk. The April survey period corresponds to the first quarter of 2018.
The majority of the banks also said their credit standards for approving applications for consumer loans remained basically unchanged. Although 6.5% of the banks indicated those standards have “eased somewhat”. Lending standards on most categories of residential real estate loans were reported as largely unchanged as well.
Outlook for Lending Standards, Delinquencies
Looking ahead, banks generally expect to ease standards on residential mortgages, however, this trend doesn’t seem to extend toward credit card loans, according to a separate series of questions in the January survey asking about banks’ lending conditions for the whole of 2018.
Rising average FICO scores further indicate that both debt as a portion of income and loan delinquency are likely to remain low.
The survey results affirmed that the prospects for consumer credit in 2018 remain strong while the industry retains a prudent toward risk. Although loan default is a key risk, current strong labor market conditions combined with long-term household deleveraging will help to restrict delinquencies. With unemployment at 3.9%, its lowest level since 2000, consumer repayment ability looks strong.