Demand for commercial loans softened dramatically in the third quarter, as noted by both the Federal Reserve Bank of New York and Federal Deposit Insurance Corporation, signaling that businesses continue to be cautious about making capital investments amid a not-yet-signed trade deal with China and slowing economic growth.
Both large and small firms reported lower demand for business loans, which was fully evident once federally insured banking institutions released their third-quarter financial information, according to the October release of the Senior Loan Officer Opinion Survey. This occurred even though lending standards and interest rates were largely unchanged.
As demand for commercial loans falls, outstanding balances rise
The decline is the latest in a series of reports, including the RSM US Middle Market Business Index and Manufacturing Outlook Index, that businesses remain uncertain about the longevity of the current business cycle.
As concerns surrounding domestic and global growth linger alongside of the not-yet-signed phase one trade deal with China and trade questions with the European Union, business sentiment and the desire for businesses to invest will remain at low levels.
Although banking institutions still expect to see continued demand for commercial real estate and consumer loans, as noted in the Senior Loan Officer Survey, the lack of commercial loan demand will weigh on overall loan growth, which will ultimately hurt their margins.
While healthy companies can take advantage of favorable underwriting terms and low interest rates, banks will need to look at other lines of business, like investment banking, asset management and mortgage banking subsidiaries, to drive non-interest revenues and sustain profitability.
