In the upcoming earnings season, U.S. banks are likely to see the strongest loan growth since the start of the pandemic, but soaring interest rates and weak economic momentum are raising concerns about the outlook for the rest of the year.
“There are a lot of questions from investors about the sustainability of strong loan growth,” said Piper Sandler analyst R. Scott Siefers, adding that banks would likely be candid about the changing macroeconomic environment in course of the last three months. “There could very well be more of a notion of, ‘Hey, we’re sticking to our advice, but it’s probably going to be quite busy at the start of the year, as we prepare for maybe some weaker trends. as we go along.'”
Total commercial bank lending rose 3.7% to $11.385 billion from March 30 to June 29, according to seasonally-adjusted data from the Federal Reserve, building on a strong fourth quarter of 2021 and continued momentum in the first quarter of this year. Growth in the second quarter of this year continued to be broad-based, with commercial and industrial loans up 6.0% to $2.681 billion from March 30 to June 29, and consumer loans up 2.8% to $1.771 billion.
Banks were largely positive about the lending outlook in investor presentations in June, Bank of America Corp. citing factors such as recovering utilization rates on business lines of credit and PNC Financial Services Group Inc. saying its commercial loan growth was a bit stronger than expected. PNC is one of the first banks to release its results, as it is due to report on July 15, a day after JPMorgan Chase & Co.’s release. BofA is due to report on July 18.
The banks’ guidance points to “accelerating loan growth through 2022,” Raymond James analysts said in a July 7 note. But rate hikes that are slowing the economy could weigh on lending in the second half of the year and into 2023.
“We do not anticipate much on the evolution of the growth prospects on [second-quarter] earnings calls, but we are somewhat concerned that the more aggressive pace of Fed hikes will push demand forward to some extent,” said analysts at Raymond James. weakening economy.
Banks could also benefit from a reversal in bond market conditions as rates and credit spreads jumped – the once easy access to capital market funding put pressure on bank lending for much of the pandemic.
“Because capital market volumes have fallen quite dramatically and spreads have widened, some borrowers have turned to their banks for loans,” said David Fanger, senior vice president at Moody’s. “It’s probably good in the sense that [it’s] banks are unlikely to significantly weaken their underwriting standards at this point in the cycle,” and instead pick up borrowing on their balance sheets that would have been elsewhere in previous quarters.
“The closure of capital markets for issuance likely contributed to the growth in commercial lending,” Piper Sandler analyst Jeff Harte confirmed. He added that a deceleration in consumer spending growth could eventually blunt growth in credit card borrowing and that weakening CEO confidence is a signal that business demand could be eroding.
In June, Wells Fargo & Co. said it expected loan growth to slow as the Fed raises interest rates and the bank would hedge as stressed borrowers seek additional funds. . Wells Fargo is expected to release its results on July 15.
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On the deposit side, outflows emerged, with total commercial bank deposits down 0.1% after seasonal adjustment to $18.072 trillion from March 30 to June 29, and down 1.5% without seasonal adjustment. .
Analysts fear that rapid rate hikes by the Fed could push deposit costs up faster than expected, with deposit outflows simultaneously hurting net interest income by dampening the size of balance sheets.
Indeed, seasonally adjusted assets rose just 0.8% to $22.842 billion from March 30 to June 29, and rapid loan growth squeezed other asset classes. Cash decreased 6.4%, or $232.30 billion, to $3.400 billion, and securities holdings decreased 0.6%, or $32.80 billion, to $5.792 trillion .
While higher interest rates have made securities purchases more attractive, banks have been cautious in the face of uncertainties about how much liquidity they need to deploy under different deposit flow scenarios. Rising rates have also hurt the value of banks’ bond portfolios, limiting their capital capacity.