By Telis Demos
NEW YORK (Dow Jones)–US banks would like to give out more loans, but not to everyone.
One way for US banks to offset the pressure from rising deposit costs would be to boost lending: more of them, even if they bring in less in some cases, could still lead to bottom line earnings growth.
However, US bank lending is currently growing very slowly. According to the Federal Reserve’s latest weekly survey, total credit growth at U.S. banks in the third quarter so far on an annualized, seasonally adjusted basis was 3.6 percent, well below the long-term average of 7 percent, according to analyst Brian Foran of Autonomous Research.
This partly reflects weaker demand for loans, due in large part to rising interest rates. The high interest rates have made borrowing for the purchase of houses or cars as well as for business financing significantly more expensive. This is more noticeable in some sectors than others, such as commercial real estate, where landlords of mostly vacant office buildings may struggle to cover the higher costs of new loans.
But there is also reluctance when it comes to granting loans. Because even if the economy remains strong and consumers and businesses want to increase their borrowing, banks may hesitate. That’s because banks can’t easily brush aside concerns about the stability of their deposits, because investors and regulators also have a say. They will also have to contend with increasing capital requirements resulting from a series of new proposals from the Federal Reserve.
Since the bankruptcies of Silicon Valley Bank and First Republic Bank are still fresh in their memories, many investors see customer deposits as an entry criterion to get back into the seemingly very cheap bank stocks. According to Factset, S&P 500 banks are valued at 8.7 times forecast earnings for the next 12 months, while the 10-year average is over 11.
Bank stocks rallied earlier in the week after M&T Bank reported mid-quarter on Friday that total deposits rose 2 percent so far in its second quarter. However, banks will continue to need to increase their loan portfolios to offset pressures as their funding costs rise faster than the returns on loans.
Some banks have described themselves as “on a diet” as they become much more selective about granting risky loans and financing. There was a common message at Barclays’ bank analyst conference this week: cheap loans are only given to the best customers.
Lending and investment firm Truist Financial said Monday that indirect lending, such as through third-party mortgage lenders or vehicle sellers, will be streamlined in favor of lending capable of “creating comprehensive customer relationships, deposit relationships and long-term asset relationships.” Citizens Financial stated that “our pace of growth will depend on our ability to develop a strong deposit profile” and that “we will not provide capital or loans to those who do not intend to enter into a banking relationship with us and enter into the customer relationship business.” “.
Even the largest banks are feeling the pressure. Bank of America said that if capital requirements were higher, it would have to examine, among other things, how many unused credit card lines it could offer.
JPMorgan Chase Chief Executive Jamie Dimon said the Fed’s new proposals implied that “certain things shouldn’t be kept in the banking system. That’s what it means. Almost all loans suck.” The proposal includes higher risk weights for loans such as certain types of mortgages.
Dimon may also be trying to open the eyes of regulators. But that doesn’t mean he’s wrong that bank lending could slow. At the very least, this means that the growth prospects continue to be overshadowed by uncertainty.
Focusing on giving better loans to better customers is definitely not wrong. The only problem is that there may not be enough of them to accommodate these loans.
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September 14, 2023 03:11 AM ET (07:11 GMT)
2023-09-14 07:29:34
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