Tuesday Premarket: Spotlight on Bank Lending, Earnings Results

Premarket action on Tuesday had the three major U.S. indexes trading lower. The Dow Jones industrials were down 0.35%, the S&P 500 down 0.36% and the Nasdaq 0.4% lower.

The Federal Reserve’s survey of senior loan officers released Monday afternoon briefly sent equity indexes straight down. Tighter lending standards and weak demand for commercial and industrial loans to firms of all sizes were the rule among businesses over the course of the past three months.

Lending standards for consumers also tightened across all kinds of residential real estate loans other than government-backed (Sallie Mae and Fannie Mae) residential mortgages. Demand for residential real estate loans was weak, banks reported tighter standards and weaker demand for home equity lines of credit and tightening standards and lower demand for all types of consumer loans, except credit card debt, for which demand was essentially unchanged.

The survey included three sets of special questions: one asking about commercial real estate loans, the second the reasons for changing standards on all types of loans and the third asking for the officers’ outlook for the rest of 2023.

Tightening of commercial real estate lending is the result of more frequent changes to “wider spreads of loan rates over banks’ cost of funds and lower loan-to-value ratios.” A less favorable, more uncertain economic outlook, a reduced appetite for risk, lower value for collateral, and funding costs affected all loan types.

In responses to the questions about banks’ outlook for the rest of the year, those surveyed said they expect lending standards to continue tightening in all lending categories:

Banks most frequently cited an expected deterioration in the credit quality of their loan portfolios and in customers’ collateral values, a reduction in risk tolerance, and concerns about bank funding costs, bank liquidity position, and deposit outflows as reasons for expecting to tighten lending standards over the rest of 2023.

PacWest Bancorp (NASDAQ: PACW), Western Alliance Bancorp. (NYSE: WAL) and First Horizon Corp. (NYSE: FHN) all began trading with solid gains Monday morning. PacWest was up as much as 30%, before closing up just 3.7%. In Tuesday’s premarket session, PacWest stock traded down by nearly 16% and Western Alliance traded down about 9%. First Horizon, which closed down about 2.2% on Monday, traded down about 2.8% in Tuesday’s premarket.

Winners in Tuesday’s premarket session include Palantir Technologies Inc. (NYSE: PLTR), which traded up nearly 18%, despite issuing downside guidance for the second quarter after beating first-quarter expectations on both the top and bottom lines. Revenue guidance for the full year was in line with prior estimates but, according to one analyst, represents the lowest revenue growth rate for Palantir in the company’s years as a publicly traded company.

Among Tuesday’s premarket losers was Lucid Group Inc. (NASDAQ: LCID), down about 9% after reporting first-quarter results after markets closed Monday. The really bad news is that production totaled just over 2,300 units and deliveries totaled a mere 1,406. Preorders have dropped from 34,000 in November to 28,000, and the company’s luxury Lucid Air is not eligible for the federal tax credit. The company has discounted its cars by $7,500, the federal maximum credit, but that drains cash. The company did say it had enough cash to operate into the second quarter of 2024.

Here is a look at how the markets fared on Monday.

Seven of 11 market sectors closed lower on Monday. Real estate (−0.69%) and industrials (−0.37%) posted the day’s worst losses. Communications services (1.27%) and consumer cyclicals (0.3%) had the day’s best gains. The Dow closed down 0.17%, the S&P 500 up 0.05% and the Nasdaq up 0.18% on Monday.

Two-year Treasuries added eight basis points to end the day at 4.0% on Monday, and 10-year notes also added eight basis points to close at 3.52%. In Monday’s premarket, two-year notes were trading at around 3.98% and 10-year notes at about 3.49%.

Monday’s trading volume was well below the five-day average. New York Stock Exchange losers outpaced winners by 1,574 to 1,405, while Nasdaq decliners led advancers by fewer than 150 issues out of 4,500 stocks trading on the exchange Monday.

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