Commercial lenders aren’t sweating rate hikes — at least not yet
Community bank executives say demand for commercial loans remains strong despite recent hikes in the Federal Reserve’s benchmark interest rate.
The blitz on home loans and refinances is coming to an end, however.
Ion Bank Chairman and CEO David J. Rotatori said interest rates remain historically low and builders and other commercial borrowers have “plenty of headroom to maintain profitability.”
“A lot of them have already refinanced, so they’re all in relatively good shape, and the amount of liquidity in the market right now is very high,” Rotatori said.
Residential real estate loans are another story. Housing prices have jumped 20-45% over the past year. Interest rates have moved from the low range of 3% to the average of 5%, making monthly payments more expensive and less affordable, Rotatori said. There are still purchases going on, but it’s slowing down. Mortgage refinancing dried up two months ago, he said.
Rotatori said he advised his own daughter, a recent graduate of the University of Connecticut School of Pharmacy, against buying a house right now. Better to wait six months and see what the landscape looks like, he said.
Rototari still forecasts a record year for its $1.7 billion asset bank for commercial loans, spurred by the construction of apartments, warehouses, healthcare facilities and manufacturing capacity. Economic activity does not appear to be clustered in any one sector, he said.
George Hermann, president and CEO of Windsor Federal Savings, with assets of $739.6 million, acknowledged the economy was being shaken from many angles. There are shortages in the supply chain, the war in Ukraine and the associated inflation. But Hermann predicts the robust economy can weather those shocks without a recession, provided the current supply chain issues don’t drag on too long.
Hermann said it will take time for the impact of recent rate hikes to show. But they were well-wired by federal officials, allowing businesses and investors to prepare, he said. Many decided to borrow before interest rates rose.
“If they were trying to decide whether they were going to do something or not, they would pull the trigger and do it,” Hermann said.
Banks have also cultivated high levels of available cash as cover. This has been helped by the pandemic, which has sent bank deposits skyrocketing as individuals and businesses are reluctant to spend and borrow money amid uncertainty related to the health crisis.
Connecticut’s 32 federally insured banks held $116.3 billion in deposits at the end of December, up 7.5% from a year earlier, according to data from the Federal Deposit Insurance Corp.
“It’s like buying inventory ahead of time,” Hermann said. “So the impact of the rate hike hasn’t really hit yet, and realistically it probably won’t show much until the summer.”
Interest rate hikes have slowed home lending, but it hasn’t completely killed activity as expected, Hermann said. He attributes this to an ongoing shortage of available housing.
Hermann said it’s hard to predict if there will be an economic downturn. Commercial lending activity remains robust, he said.
At the end of December, federally insured Connecticut banks held $83.8 billion in loans and leases, down 6.3% from a year ago, according to FDIC data.
“We still see, based on our pipeline, that there’s pretty good demand right now,” Hermann said. “There is a great need for warehouse and distribution. There is always demand for housing. Our main fender manufacturers between Pratt [& Whitney], Sikorsky and Electric Boat have very good contracts. Many subcontractors purr and have needs.
Economic forecasts are murky and mixed.
John Carusone, president of the Hartford-based Bank Analysis Center, said the growing list of economic challenges creates strong potential for a slowdown and slowing in demand for commercial loans.
Overly generous federal spending coupled with a delayed response to obvious inflationary risks resulted in a 40-year inflationary spike, Carusone said. It will take tough measures to stem it.
“It is likely that the recent 50 basis point rate hike is only the first of many such hikes, as inflation will not be fully contained until the Federal Reserve’s target rate is equal. or above the rate of inflation,” Carusone said.
In a May 4 statement, Fed Chairman Jerome Powell said further rate hikes of half a percentage point were possible.
Today’s extraordinary inflationary pressures resemble those of the early 1980s, when the Fed raised the reserve rate to 18% to curb double-digit inflation, Carusone said. This pushed mortgage rates up to almost 20%.
“The question is how can the Fed kill inflation without plunging the economy into a recession, a major economic downturn, or, more onerous, a period of stagflation where you have high levels of inflation and a stagnant economy, like we did in The Carter 50 years ago,” Carusone said.
Carusone agreed that home loans are drying up and commercial loans haven’t been hit much — at least not immediately.
“Not yet, but the likelihood is quite high that there will be growing pressures on credit quality and loan demand and price changes as the Fed continues to raise interest rates to deal with this inflation,” Carusone said.
Pictures | Nathan Oldham, UConn School of Business
UConn economist Fred Carstensen said Connecticut’s economy has been lagging for a decade and the coronavirus pandemic will only exacerbate the state‘s challenges.
Fred Carstensen, director of the Connecticut Center for Economic Analysis at the University of Connecticut, does not foresee any near-term impact from the rate hike. Builders and businesses are already engaged in high-demand projects, such as multi-family housing and warehouses.
“It looks like the economy is doing very well, so it can bear the costs of moderate increases in interest rates,” Carstensen said. “We used to celebrate when we could get rates down to 6%.”
Carstensen sees fundamental economic weaknesses in Connecticut and beyond. Income inequality, the lack of affordable housing and the growing monopolization of various industries are bigger challenges than inflation, which could be short-lived if the war in Ukraine and the supply chain problems induced by the COVID-19 were easing, Carstensen said.
Carstensen pointed to the latest robust jobs report, which saw Connecticut’s unemployment rate continue to decline, hitting 4.6% in late March.
He also noted that interest rates remain historically low. Rates have not climbed high enough to deter economic investment, and the hype around economic challenges, including rising rates, outweighs the real threat to economic activity, he said. .
“At the margin it will delay some major purchases, but for the most part it seems people are being reasonably patient,” Carstensen said.