December 17, 2018 / 12:10 PM / 3 months ago

U.S. banks quietly pull back from riskiest loans amid recession fears

(Reuters) - As U.S. bank stocks tanked this month over fears of an impending recession, industry executives downplayed concerns to colleagues, analysts and journalists, arguing that the economy is in great shape.

Jamie Dimon, CEO of JPMorgan Chase, leaves after the launching of the Advancing Cities Challenge, in Pantin, a suburb of Paris, France, November 6, 2018. REUTERS/Benoit Tessier

But looking behind headline numbers showing healthy loan books, problems appear to be cropping up in areas such as home-equity lines of credit, commercial real estate and credit cards, according to federal data reviewed by Reuters. Lenders are also starting to cut relationships with customers who seem too risky.

All of that suggests U.S. lenders will feel the pain of a recession soon, even if losses are not cropping up quite yet.

“We are in somewhat of a goldilocks period of banking,” Andy Schornack, chief executive officer of Flagship Bank Minnesota, told Reuters. “Interest rates are high enough that you can make good money and credit quality is at high enough levels where it’s pretty hard to lose money.” Bank executives acknowledge that the U.S. economy is probably in the final stages of a long recovery from the 2007-09 global financial crisis. But they say that until credit metrics start to deteriorate meaningfully, there is no reason to boost reserves or slash customer financing.

“There is a big disconnect at this point in time between the market technicals and what we’re really seeing on the ground,” Citigroup Inc (C.N) Chief Financial Officer John Gerspach said at an industry event last week. “The fundamentals still look very good.”

His comments were echoed by other attendees including Bank of America Corp (BAC.N) CEO Brian Moynihan, Wells Fargo & Co (WFC.N) CEO Tim Sloan, and JPMorgan Chase & Co (JPM.N) CEO Jamie Dimon.

Although delinquency and default rates remain near historic lows, as do industry reserves and charge-offs for bad debt, banks have started to pull back.

Nearly half of the applications from customers with low credit scores were rejected in the four months ending in October, compared with 43 percent in the year-ago period, according to a survey released by the Federal Reserve Bank of New York. Banks shuttered 7 percent of existing accounts, particularly among subprime borrowers, the highest rate since the Fed started conducting surveys in 2013. Home-equity lines of credit declined 8 percent across the industry, with growth slowing in areas such as credit cards and commercial-and-industrial loans, the survey showed.

Capital One Financial Corp (COF.N), one of the biggest U.S. card lenders, is restricting how much it lends to each customer even as it aggressively recruits new ones, CEO Richard Fairbank said at the event last week.

“We have been more cautious in the extension of credit, initial credit lines, the broad-based credit line increase programs,” he said. “At this point in the cycle, we’re going to hold back on that option a bit.”

Executives at regional banks also say they have become more cautious lately. They avoid financing riskier projects like early-stage construction loans and properties without pre-lease agreements.

New Jersey’s OceanFirst Bank has also pulled back on refinancing transactions that let customers cash out on their debt, and has started reducing exposure to industrial loans, CEO Chris Maher told Reuters.

“In a downturn, industrial property is extremely illiquid,” he said. “If you don’t want it and it’s not needed it could be almost valueless.”

Such data points, combined with the looming threat of an inverted yield curve, have sent bank stocks down more than 13 percent since the first trading day of the month, according to the KBW Nasdaq Bank Index .BKX.

Even so, bankers and analysts say the next recession will look much more like the 2001 tech bubble bursting than the 2007-09 global financial crisis.

“I lived through the pain of the last recession,” said Schornack. “We are much more prudent today in how we underwrite deals.”

Reporting by Imani Moise; Editing by Daniel Wallis

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