Anticipating recession, banks start scrubbing loan books

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While the Federal Reserve is doing what it can to extend the economy’s growth streak, some banks are preparing for the inevitable downturn — including letting loans in riskier segments run off without rushing to replace them.

Bank executives used second-quarter conference calls to highlight specific business lines that are raising concerns. Several banks are pulling back from commercial real estate, but lending overall is expected to get more conservative, said Eric Compton, a banking analyst with the credit rater Morningstar.

“Regulators are partly responsible for this, and I also think there is some institutional memory around how bad the last crisis was, that it was concentrated within the banking system, and the banks this time around do not want that to happen again,” Compton said. “The banks are actively positioning in a more conservative way, especially when compared to the last cycle.”


Banking executives backed up that assessment in discussions with analysts.

Keith Cargill, CEO of the $29.9 billion-asset Texas Capital Bancshares, said the Dallas company has been de-risking its portfolio, especially in leveraged and energy-industry loans, which can be especially sensitive to economic slowdowns.

Texas Capital's book of commercial-and-industrial and leveraged loans — the bank combines the two categories — shrunk 13% over six months to $1.1 billion as of June 30. Executives said they are planning to cut this portfolio by 30% for the full year, either by letting loans run off or being selective in refinancing credits.

“I really believe we're de-risking the balance sheet early compared to some banks,” Cargill said on a July 17 call with analysts.

Lenders at CenterState Bank in Winter Haven, Fla., used to win more than half of C&I loan opportunities, but the $17 billion-asset company has begun stepping away from more of these deals, President and CEO John Corbett said on a July 24 earnings call.

CenterState passed up on about $700 million of loans in the second quarter. About 85% of those would have involved underwriting terms that were too lax in CenterState’s eyes, Corbett said. CenterState’s loan growth for the quarter, net of a spike in payoffs because clients were either selling projects or their entire companies to get ahead of economic concerns, was just 1%.

“Today, we're taking ourself out of the process fairly early, because the terms just simply don't make sense,” Corbett said.

CenterState is especially worried about multifamily properties in its home state of Florida, which proved to be a tinderbox during the financial crisis a decade ago. Its business clients, many of which have been family-owned for generations, have grown more cautious, too.

Investors can buy or sell shares in a day, but “any loan decision that we make, we're planning on living with it for the next five years," Corbett said. "So I'm not saying we're at the end of the cycle, but we're clearly late cycle, and we're trying to be forward-looking and looking at every decision we make as three- to five-year risks.”

The Fed on Wednesday lowered its main borrowing rate by 25 basis points in order to prop up the U.S. economy against the ill effects of trade disputes and slowdowns abroad. But central bank Chairman Jerome Powell indicated it might be longer than some expected before it makes another cut as officials wait to see how the economy fares.

Executives at several banks — including Bank of New York Mellon — avoided calling out specific industries but said generally they are moving toward safer loans in case of an economic slump.

The total loan book at the $381.1 billion-asset BNY Mellon had declined by 9.3% at June 30 from a year earlier to $52.3 billion, which the bank partly attributed to more cautious lending practices. Its CEO, Charles Scharf, was asked if the bank plans to rev up lending efforts to help alleviate pressure on its margins — a problem the industry as a whole is grappling with as interest rates drop.

But Scharf indicated BNY Mellon would rather avoid the risk.

“We're trying to be far more selective about where we can pick up some yield without putting ourselves in a position, especially at this point in the credit cycle, that we will regret later on,” Scharf told analysts on July 17.

Still, many executives were specific about where they are de-risking.

The $25.3 billion-asset Western Alliance Bancorp in Phoenix trimmed construction and land development loans by about $200 million from a year earlier to roughly $2 billion at June 30.

Company officials said they are planning to stay conservative for the longer term, even if the Fed decides to accelerate its rate cutting.

“So if we have a couple more rate cuts, I don't think we're going to actually change our philosophy in granting credit, because we've been tightening up and we've been always worried that the expansion may stop,” Western Alliance Executive Chairman Robert Sarver said on a July 19 earnings call. “We've been very conservative in how we are pushing dollars out the door.”

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De-risking Credit quality Commercial lending Commercial real estate lending Multifamily Regional banks Community banking BNY Mellon
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