Before 2011 even began, the prediction for asset quality in the new year turned decidedly positive.

That was the premise running throughout the Federal Reserve Board's quarterly lending survey released Monday, as bankers forecast marked loan-quality improvement across every major category and were particularly optimistic about commercial and industrial loans.

Lenders, polled during the last three months of 2010, predicted stabilization this year in the quality of asset classes that in prior surveys had elicited groans, and gave some positive signs for loan demand as well.

"Expectations were significantly more upbeat than in past years," the Fed said in the fourth-quarter Senior Loan Officer Survey on Bank Lending Practices.

In addition to C&I loans, lenders reported seeing signs of life in residential loans, consumer loans and commercial real estate, or at least found that loan quality was stabilizing compared with other quarters. Nearly half of respondents reported recent growth in their portfolios of residential mortgages, with large banks more optimistic than smaller ones about improved quality in home loans.

The survey raised hopes that the easing of problem loans will soon give way to visible growth.
On C&I loans to small companies, 37 banks out of 53 questioned, or roughly 70%, expected improvement in loan quality this year. None expected slight deterioration.

Roughly 73% of the banks surveyed said they expected commercial and industrial loans to large and middle-market firms to "improve somewhat" in quality.

The figures were similarly encouraging for CRE lending. A majority of banks, 55%, said they expect delinquencies and chargeoffs of their commercial real estate loans to "improve somewhat" in 2011. Three large banks said loan quality would likely "improve substantially."

Perhaps more notable were the findings about business loan demand. More than a third of banks reported greater C&I demand from large and middle-market firms.

Of the 57 banks surveyed about loans to large and midsize companies, seven eased their standards for the borrowers. Most others reported that standards were unchanged.

Respondents indicated that certainty about the broader economy was one reason for eased lending standards.

"Regarding loans to businesses, survey respondents, particularly large banks, reported having eased standards and most terms on C&I loans, especially to large and middle-market firms," the central bank said.

"Banks mainly pointed to a more favorable or less uncertain economic outlook and increased competition from other banks or nonbank lenders as reasons for easing."

While 33% of all banks surveyed reported demand for C&I loans to large and middle-market firms was "moderately stronger," that figure was larger for big banks, of which half reported such strong demand. Higher demand at smaller banks enjoyed a small boost, with seven out of 54 reporting demand was moderately stronger.

Even though the Fed survey said standards for CRE loans were reportedly unchanged, there were promising indicators of increased demand. Nearly a quarter of banks reported "moderately stronger" demand for CRE loans. Two large banks reported "substantially stronger" demand.
Meanwhile, banks were split on the question of whether the quality of prime residential loans was merely stabilizing or showing signs of improvement.

Similarly, 52% of institutions reported a stabilization of loan quality for nontraditional mortgages. Banks also saw an increased likelihood of stabilization for the quality of home equity lines of credit.

Banks were equally upbeat about consumer loans.

"The survey also found that about 50% of banks, on net, expected improvements this year in the quality of consumer loans, including both credit card loans and other consumer loans," the Fed survey said.

A total of 24 banks out of 53 said they expected consumer loan quality to improve, while another 27 banks expected it to stabilize at current levels.

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