American Banker Index of Banking Activity Dips After Spike in Long-Term Interest Rates

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Composite Reading of 57.7 a Dip from Previous Month

The American Banker Index of Banking Activity (IBA) registered a reading of 57.7 in June, a retreat from its recent all-time high but still indicative of increased business activity in the sector.

The recent spike in long-term interest rates likely played a role in damping the banking industry’s pace of expansion. The rate spike was a reaction to comments from Federal Reserve Chairman Ben Bernanke that markets interpreted as indicating the potential for a near-term curtailment of the Fed’s quantitative easing.

Consumer lending indicators retreated, with readings for applications (54.2) and approvals (52.6) below 59 for the first time since February. The reading for commercial loan applications, which had been at a high of 66.7 in April, also fell from 63.5 in May to 57.8 in June.

The IBA tracks the level of business activity across a range of factors that are fundamentally important to the commercial banking business. Composite readings above 50 indicate an expansion of activity and readings below 50 point to contraction. The farther from 50 a reading is, the stronger the indicated change.

The IBA is a product of American Banker's regular surveys of banking executives and is published in partnership with VantageScore Solutions. The latest installment of the index was based on 270 responses to surveys. The most recent data is based on a survey conducted in July.

BANKING INDUSTRY CONDITIONS

Loan pricing indicators, having endured months of pressure, turned upward thanks to the higher long-term rates. Consumer pricing registered at 53.7 and commercial pricing was 51.4. In both cases, those were the first instances of readings above 50 since the IBA’s June 2012 debut.

June also provided evidence of a trimming of bank payrolls. The index reading for staffing fell to 47 in June from 51.7 in May. Some attribute these moves to a cutback in mortgage jobs related to a lessening in refinance activity.

WHAT RESPONDENTS ARE SAYING

In addition to the quantitative elements of the survey that support the IBA, open-ended questions are posed to respondents seeking information on the factors they believe are having the biggest immediate impact on their businesses.

Lenders note that the stabilizing of the economy and improved housing market should help business. “Residential real estate market conditions continue to strengthen in the bank’s primary markets,” one lender said. “Coupled with improving consumer confidence levels, this has provided positive momentum for asset quality improvement and moderate loan growth, despite fierce competition for creditworthy borrowers.”

Other lenders agreed that economic activity is a boon, but as one said, it is “still tough to find good lending opportunities that are not driven solely by price.” Another said, “Good loan prospects are hard to find.”

As the index indicates, some bankers are redirecting their efforts away from the refinance flurry. “We are experiencing a higher demand for [government] real estate loans -- more new purchases than refinances,” one lender said.

HOW THE INDEX WORKS

The Index of Banking activity is a diffusion index made up of 11 equally weighted sub-indicators that summarize various business activities, such as loan activity (e.g. applications, approvals, delinquencies and loans outstanding), loan pricing, deposit account activity, staffing, and business and real estate conditions.

Respondents are asked whether each sub-indicator increased, decreased or had no change from the previous month. Responses do not include opinions, intentions or expectations, although bankers were given the opportunity to comment about market conditions.

FUTURE INDEX READINGS

Monthly readings of American Banker's Index of Banking Activity will be presented as a time series that can be used to monitor the prevailing rate and direction of change in banking business cycles and eventually to benchmark whether an institution is operating in line with overall industry needs.

About American Banker Research
American Banker Research is a unit of American Banker, the flagship information brand of the diversified B-to-B media company SourceMedia. American Banker Research brings a full range of professional research capabilities to companies and executives in banking and payments. The unit manages the American Banker Executive Forum, a community of senior banking and payments executives who are committed to regularly sharing opinions and insights with the editorial and research groups at American Banker. Members include qualified professionals who read American Banker and its sister brands Bank Technology News and PaymentsSource, and attend their professional conferences. These include C-level executives and other senior professionals employed at commercial and community banks, bank holding companies and other financial companies across all asset classes.

About SourceMedia
SourceMedia, an Investcorp company, is a business to business media and marketing solutions company serving the financial industry and the related fields of professional services and technology. SourceMedia offers its clients and subscribers professional information services, industry-standard research, data applications, in-depth seminars and conferences, and specialized marketing services.

About VantageScore Solutions
VantageScore Solutions, LLC (http://www.vantagescore.com) is the independently managed company that owns the intellectual property rights to the VantageScore credit scoring models, including the recently announced VantageScore 3.0 model which provides up to 25 percent predictive improvement over earlier models and has the ability to formulate a score for 30 – 35 million previously unscoreable consumers. Initially developed by America’s three national credit reporting companies (CRCs) — Equifax, Experian and TransUnion — VantageScore Solutions’ highly predictive models use an innovative, patented and patent-pending scoring methodology that provides lenders and consumers with more consistent credit scores across all three national credit reporting companies.

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