Banks brace for more loans to deteriorate as interest rates rise

Consumers have gone into debt throughout the pandemic – it’s thanks to heavy spending and higher prices. But as interest rates rise, many lenders are monitoring whether consumers can repay.

Even though rates have gone up, there is still a lot of demand for mortgages, home equity lines of credit and business loans at Bay State Savings Bank in Massachusetts.

CEO Peter Alden said his clients’ finances looked pretty healthy. “Our delinquency rates are still low and our order book is still strong,” he said.

But Alden thinks that could change in the coming months.

“I just have a feeling between, you know, the rising costs of everything, that crime should go up, because people are still trying to put food on the table and heat their homes for this coming winter and all that.”

A sign that delinquencies could increase? Consumers are saving half as much money as a year ago.

Mayra Rodriguez Valladares of MRV Associates said many people have immersed themselves in their savings.

“So they need more money to pay the credit cards. They need more money to pay off that gas, you know, any of their loans,” Valladares said. “And so that means you’re also going to, most likely, start to see reductions in deposits at banks.”

As a result, Valladares said, lenders have taken steps to ensure they are prepared for further delinquent loans.

“So that means banks have additional capital that they need to allocate in case of unexpected losses. And it certainly means that they need to increase their loan loss reserves.

In other words, banks set aside cash in case their existing loans go bad.

“We’re trying to heavily test portfolios and run models on what might happen if performance declines for certain types of borrowers,” said Dominik Mjartan, CEO of Optus Bank in South Carolina.

The bank has taken a closer look at new borrowers and loans it has already made, he added.

“We try to read tea leaves, like everyone else.”

So far, the bank’s loan approval rate has not changed much, Mjartan said. But even if his clients’ balance sheets still look strong, he said, it pays to be prepared when times are good.

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