November 12, 1975
Lending activity at the district's largest banks continues to weaken. Total loans at weekly reporting banks have edged downward since the first quarter of this year. The lackluster pace of lending is reflected in the aggregate loan-deposit ratio for these banks which continues to fall and now stands 11 percent below the cyclical peak in February 1974. Although loan demand is weak, bankers admit that restrictive lending policies are playing a major role in holding down the volume of loans. In fact, a veteran Fort Worth loan officer has said that today's borrowers are facing the most stringent credit requirements he has seen in his career with the bank.
Commercial and industrial loan demand are running well below the level most loan officers expected during this phase of the recovery. There appears to be little inventory accumulation in progress. One reason for this is that many manufacturers are finding materials and unfinished goods readily available from suppliers. They are taking advantage of this favorable supply situation by keeping their own stocks low, thereby reducing working capital requirements. In addition, the high level of earnings generated over the past couple of years by many energy-related firms, particularly suppliers of oil field equipment, has reduced the need for bank credit.
While the volume of business loans remains low, the composition of demand for funds has shifted markedly. Loan officers report they are being besieged by applications for term loans. Moreover, these requests are altogether different from the type of term-loan demand bankers saw in the early seventies. Then, customers sought term loans for "productive" purposes—to finance plant and equipment expenditures and for corporate acquisitions. But today, according to these bankers, virtually all such applications are from customers with depleted working capital who are seeking to improve their liquidity positions by converting much of their short-term bank borrowing to term debt. Loan officers maintain that these firms have not been able to "get their house in order" following the severe dislocations of the past couple of years. The vast majority of these term-loan requests are being turned down.
In real estate lending, reducing exposure to potential REIT losses continues to be the dominant concern of loan officers at the larger banks. Nevertheless, bankers appear somewhat more optimistic about these loans even though there are only a handful of sound REIT lines among the banks surveyed. Although payoffs have been slow, in a number of cases they have been running well ahead of the pace predicted earlier this year. A Houston loan officer, for example, says his bank has reduced REIT loans to $40 million, down from $48 million just a few months ago, and none of these lines are currently being carried on a nonaccrual basis. According to an El Paso banker, the payback from a REIT bankruptcy has reached 25 percent and is expected to go higher, reducing that loss to less than the amount the bank had already charged off.
Bankers report a favorable outlook for expansion in consumer credit during the coming holiday season in light of growing indications that consumers are stepping up their spending. One positive sign has been a sharp decrease in the number of applications for debt consolidation loans this year. Credit card usage is on the rise, and suburban bankers note that automobile loans have picked up. In addition, there are numerous reports of banks offering comprehensive service packages in attempts to rekindle consumer borrowing.
Good harvests, increased marketings of cattle, and higher average prices since midyear have bolstered crop and livestock sales in the Eleventh District. Consequently, cash flows to farmers and ranches have improved, and rural bankers report the rate of loan repayment has increased while the number of renewals and extensions has declined. Although flush with funds, agribankers continue to be very cautious in granting credit. Uncertainty over markets and weather and the carryover effects of depressed incomes in 1974, particularly among cattle feeders, serve to keep collateral requirements firm.
Nevertheless, agricultural lending this fall is above year-earlier levels. Rising production costs and slightly more acreage in cultivation have increased the farmer's demand for bank credit. And, as a result of good harvests, the volume of crop storage loans is up substantially. Also, improved income prospects have led to more farm machinery loans.
Livestock lending has been bolstered by a large increase in the number of calves on feed since midyear. However, strength in the livestock sector is being tempered by a reduction in cattle purchased for grazing, owing to the dry weather that has lowered the prospects for winter foraging. In addition, dairymen continue to trim capital outlays in response to the severe cost-price squeeze in that industry.
The men's and women's spring apparel shows held at the Dallas Apparel Mart in October attracted a record number of buyers and sellers from across the country. Sales were termed brisk as retailers attempted to replenish their depleted inventories. Some manufacturers felt that many buyers were double-ordering to insure delivery of goods. Double-ordering stemmed from the fact that shortages of some piece goods have appeared, and some firms are finding it difficult to meet delivery schedules. Apparel manufacturing in Texas continues to recover, as production is now 15 percent above the March low. Sales to the national retail chains, which represent most of the state's output, have rebounded strongly. Several new manufacturing facilities began production last quarter, and one of the state's largest garment makers reopened a large plant last month that was closed down in February.