All signs are pointing to a credit crunch, says a top Wall Street strategist

Silicon Valley Bank’s fallout last month could make it harder for businesses and consumers to take out a loan.

“When the banking stress first surfaced, my primary takeaway for U.S. equity markets was that it would lead to a credit crunch,” Mike Wilson, Morgan Stanley’s chief U.S. equity strategist, explained in the firm’s Thoughts on the Market podcast on Monday. “The data suggests a credit crunch has started. And the data shows the “biggest two-week decline in lending by banks on record as they simultaneously sell mortgages and treasuries at a record pace to offset deposit flight,” Wilson said. According to Federal Reserve data released on April 14, in the final two weeks of March, loans and leases on the books of commercial banks fell by $105 billion.

Since the Fed started raising rates a year ago, “almost $1 trillion in deposits have left the banking system,” Wilson said. “Throw in the already tight lending standards and it’s no surprise credit growth is shrinking.”

The Federal Reserve Bank of New York released its March 2023 Survey of Consumer Expectations on April 10. Compared to a year ago, perceptions of credit access “deteriorated in March,” according to the report. Respondents said it’s “harder to obtain credit than one year ago rising and reaching a series high,” and they expect it will be harder to get credit a year from now. 

‘Credit contraction’

For finance executives, the threat to credit availability now adds to the challenges posed by inflation, and geopolitical concerns. And a credit crunch could prompt a recession.

“Banks will do what they have to do to preserve capital and one way to do that is to make fewer loans,” Som-lok Leung, the executive director of The International Association of Credit Portfolio Managers (IACPM), said in a statement. IACPM released its Credit Outlook Survey on April 13. As banks move toward making fewer loans, 86% of finance executives in North America surveyed say defaults will rise, while 14% expect the numbers to remain unchanged. Eighty-four percent of finance executives say a recession will occur in the U.S. sometime this year, and 61% see a recession in Europe and the U.K. by year-end. “We’re beginning to see more credit stress and defaults in corporate borrowers,” Leung said.

The industries most vulnerable are health care, medium-size tech companies, commercial real estate, and transportation, according to the report. IACPM is an association of over 130 financial institutions in 30 countries such as banks, asset managers, and insurance companies.

Goldman Sachs CEO David Solomon commented on banks and lending during the firm’s Q1 2023 earnings call on Tuesday. “The recent events in the banking sector are lowering growth expectations and there is a higher risk of a credit contraction given the environment is limiting banks’ appetites to extend credit,” Solomon said. “This is an acceleration of the trend we’re watching closely. Businesses and consumers continue to adjust to higher interest rates. And while the forward trajectory is still unclear, we continue to be cautious about the economic outlook.”

Sheryl Estrada
sheryl.estrada@fortune.com

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Big deal

A survey on wages and the cost of living conducted by jobs search site Monster.com on April 10 gauged the experiences of U.S. workers. Eighty-one percent of respondents reported that their current wage has not kept pace with the rising cost of living and inflation, causing 75% to be more mindful of their spending for basic needs like rent and groceries. Meanwhile, 85% of respondents said their most recent salary increase was less than 6% of their total salary, 62% didn't receive a bonus this year, and 55% said they haven't had a raise in more than a year. Other key findings focus on productivity, burnout, and job security.

Going deeper

The 2023 Fortuna Advisors Buyback ROI Report ranks the top-performing S&P 500 share repurchase programs. The report also explains how management created—or destroyed—value by buying back stock over the five years through 2022. A key finding is the S&P 500's 363 largest repurchasers bought back over $919 billion in stock for the full year, and nearly $280 billion in Q1 2022.

Leaderboard

Brad Lakhia was named EVP and CFO at KAR Auction Services, Inc. DBA KAR Global (NYSE: KAR), an operator of digital marketplaces for wholesale used vehicles. Lakhia brings more than 25 years of experience. Most recently, he served as VP of finance, Americas for The Goodyear Tire & Rubber Company. Before Goodyear, Lakhia held leadership roles with Andeavor (formerly Tesoro and now part of Marathon Petroleum Corporation), overseeing business planning and analysis as well as treasury and credit.

Jake Petkovich, EVP of finance and CFO and treasurer at Patrick Industries, Inc. (Nasdaq: PATK) will step down in May to accept a senior leadership position with another company. Petkovich has served as CFO of Patrick since November 2020. Matthew Filer will serve as interim CFO effective upon Petkovich's departure. Filer joined the company in November 2022 as SVP of finance.

Overheard

"They’re spending on things frankly which drive employment, meaning they’re spending on experiences at amusement parks and theaters or restaurants or outside concerts."

—Bank of America CEO Brian Moynihan told CNBC on Tuesday that the bank’s customers increased spending by 8% in the first three months of 2023 compared with the year-earlier period. This current dynamic is part of a cycle that supports employment, he explained.