Jan 16 2019
Several IBISWorld banking clients have asked me about how the federal government’s ongoing shutdown may affect their portfolio risk and lending decisions. Although these comments are somewhat bank-centric, other organizations may also find this commentary relevant. Even if a compromise is reached by the time this article is published, this does not preclude future shutdowns as inside-the-beltway gridlock has sunk to an unprecedented nadir.
For starters, check out the table below, which is drawn from IBISWorld’s database of “Common Factors” or “Key Drivers.” This delineates the industries that are most sensitive to key areas of government spending (i.e. a shutdown). For convenience, I have provided the industries’ six-digit NAICS codes, in addition to their IBISWorld five-digit code, as many banks integrate these in their portfolio management and loan origination systems.
Obviously, some industry-specific impacts are more immediate than others; and who knows how long this current stalemate will persist.
Perhaps more importantly, at least in my opinion, are the impacts endured by households of both government employees and contractors. Add to this, farmer households, whose loans and other disbursements are in jeopardy at a time when farm incomes are stressed amid weak prices and the trade dispute with China. Dev Strischek (retired SunTrust) brought the farm/rural issue up during our joint presentation on the Opportunities and Challenges for Commercial Lending at the Risk Management Association’s (RMA) Annual Risk Management Conference this past November.
Ramifications? What should you be thinking about?
- The risks are clustered locally. Talk about concentration pools! Look out for the geographic areas in your footprint that have significant government offices and/or concentrations of government workers/contractors as both uncertainty and furlough-reduced incomes blunt consumers’ appetite to spend.
- The impacts will be felt the heaviest in retail and restaurants where these clusters exist.
- As for restaurants, the upscale variety located near government agency hubs are particularly at risk. Recent reports suggest that in the Washington, DC area (where I live) many restaurants lack the traffic to make money. “Ghost towns” I’m told.
- On the retail side, in vulnerable locations, mom-and-pop shops that survive on small margins and/or sell high-end luxury goods, face very strong, and for many, life-threatening headwinds. This type of borrower is already under fire given the “Amazon Affect,” as Dev [Strischek] and I will discuss in IBISWorld’s upcoming webinar scheduled for February 20 (more details to come). Be sure to tune in.
- Last but not least, think of your consumer lending exposures in vulnerable locations. Mortgages, credit cards, auto loans. Latent risks associated with unmapped, underestimated concentrations are the curse to be avoided.
For more on these issues, I suggest readers check out the three installments of the “Flying Blind…” series I constructed with Ken Brown, the senior vice president of risk management at the CIT Group. Originally published in the RMA Journal, the series can also be found on IBISWorld’s Industry Insider:
Part Three: Concentration Risk, the Credit Cycle and Better Lending Decisions
I hope this helps your organization drill down and make some smart decisions during these uncertain times.
Edited/Designed by Taylor Feuss