Beige Book Report: Dallas
May 12, 1976
Eleventh District city bankers report loan demand is weaker than expected. They blame this on an effort by businesses to repay loans, a decline in drilling activity, and generally weaker consumer borrowing. District agricultural loans, however, show some strength.
Total loans at large commercial banks rose sharply in January. Since then, however, borrowers have been repaying their bank indebtedness. This has reduced the volume of loans outstanding to December's level. In particular, petroleum refiners have made substantial repayment of loans after two years of unusually heavy borrowing.
Recently, loans to the petroleum industry have decreased. Houston bankers report that a decline in drilling and a continuing slump in oil production have resulted in fewer loans to finance drilling equipment, oil tools, pipe, and other equipment related to energy production. And bankers cite rumors of an oversupply of drilling pipe and aggressive price discounting by sellers as evidence that weakness in drilling is likely to persist.
Spokesmen for drilling supply firms differ in their outlook for drilling activity this year. Some believe drilling will be up slightly from last year because of higher industry drilling budgets. Others feel drilling will fall below last year's level, due in part to legislative uncertainties and the rollback of new oil prices. But they also feel that a lot of the drilling has been to further develop the flow from existing discoveries, and producers have completed most of this kind of work. Finally, a gas producer reports that a slight surplus of gas on the intrastate market is discouraging deep gas exploration in west Texas.
Oil field pipe suppliers confirm bankers' fears that their customers built inventories while pipe was still in relatively short supply and drilling was strong. Now that drilling is off, these firms seem anxious to reduce inventories.
Other business loan demand is also weak. Because businesses are experiencing slow growth in demand and face no immediate threat of strong price increases, they are hesitant to build inventories. In addition, one banker reported that a few large customers have been utilizing the commercial paper market quite heavily. And other customers are making greater use of internal funds generated by higher profits. Many bankers feel that the growth in profits could continue to depress loans unless the demand for inventories picks up considerably.
The demand for consumer installment loans at large banks in the District is especially weak. Consumers have made net reductions in their bank debt for three consecutive months, and bankers indicate renewed caution by consumers despite more aggressive marketing of these loans. Loan officers at small banks, however, have noted some pickup in automobile loans and in the use of credit cards.
Largely because of higher production expenses and narrow profit margins, demand for farm and ranch credit is strong according to a survey of 230 agribankers in the Eleventh District. A number of factors have added to production costs. Natural gas prices have skyrocketed, pushing irrigation costs substantially higher. And higher prices for farm machinery have increased equipment loans. With more cattle on feed than a year ago, loans for feeding cattle have also increased.
Ample loanable funds are available at rural banks to meet the increased demand. Bankers are, however, cautiously evaluating agricultural loans; 32 percent indicate they have increased collateral requirements. The proportion of agribankers indicating more renewals and extensions than usual has decreased from 47 percent in July 1975 to 27 percent in early April, evidence that repayment of loans has improved. Higher livestock prices have made possible increasing repayment of loans in Texas; but in Louisiana, Oklahoma, and New Mexico repayments are sluggish because crop sales have decreased substantially from a year earlier. With the price received for rice depressed far below last year, the financial condition of rice growers has deteriorated. And poor harvests for two successive years have left many farmers in northern Louisiana financially weakened.