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Let’s not run for the (banking) hills just yet. The banking sector remains solid, despite such shocks as high inflation, high interest rates, and the collapse of three major banks in the first half of 2023, according to the FDIC’s 2023 Risk Review, which covers 2022 and the first quarter of 2023.
Though banks’ profitability was down in 2022 from 2021, asset quality metrics for banks were still favorable through Q1 2023, the FDIC found. The report, released Monday, outlines risks banks need to be aware of heading into the latter half of 2023. And it also sheds light on broader economic trends.
Corporate borrowing down: Corporate loan activity decreased over the 2022–23 period, due to factors such as rising interest rates, high inflation, and a sluggish economy. Small business lending also slowed, in part because of the closure of the Paycheck Protection Program, and small businesses reported feeling concerned about the economy.
Consumer and office loan troubles ahead: Higher interest rates and a slowing economy could weaken banks’ loan portfolios, the FDIC warned, especially in regards to credit card, commercial and industrial, and residential and commercial real estate (CRE) loans. Consumer debt increased, and so did the total past due rate on credit cards and auto loans, a sign that consumers may be feeling some financial strain.
Industrial, retail, lodging, and multifamily CRE loans all had “sound fundamentals including rent, price growth, and occupancy in 2022,” the FDIC said. Office space loans, however, weren’t doing as well. Demand for office space has weakened, and delinquency rates on office loans rose through May 2023.
Many office leases, the FDIC said, will expire in the next few years, and borrowers may struggle to refinance. Office space loans comprise about 17% of all CRE debt.