By Rachel Louise Ensign and Christina Rexrode
Since President Donald Trump's election, bankers and investors
predicted that pro-business policies would lead to a surge in
corporate borrowing, which would help bank profits.
Instead, the growth of loans to companies has dropped
precipitously since last November -- to 2.1% from 8.1%, according
to Federal Reserve data.
"Everybody thought we were about to catch a wave earlier in the
year," said David Turner, chief financial officer of Regions
Financial Corp., at a conference last month. "It didn't
happen."
Companies have grown more reluctant to borrow after an initial
surge of optimism following the election, said Jeff Glenzer, vice
president at the Association for Financial Professionals, a group
for corporate finance and treasury professionals. "All the turmoil
and the inability to move policy through Washington set in," he
said.
But analysts say the prolonged slowdown in commercial-loan
growth may simply be a function of the metric returning to its
normal level in recent decades. Growth in the category ran far
above gross domestic product growth in the years following the
financial crisis, a streak that is difficult to maintain for any
prolonged period.
The loan-growth metric will be front and center in banks'
third-quarter earnings reports, which start on Thursday with J.P.
Morgan Chase & Co. and Citigroup Inc.
The expected continuation of solid loan growth helped push bank
stocks higher over the past year or so. The degree to which bank
investors need to rethink that premise may affect whether the
stocks continue to outperform.
Lending profits at the banks largely depend on the dynamic
between loan growth and interest rates. While recent increases in
short-term rates have made floating-rate commercial loans more
lucrative, the benefit has been limited by the fact that banks
aren't making many more loans.
Loan growth "has fallen short of post-election expectations," a
federal advisory council of bank executives said at a September
meeting, according to recently released minutes. Part of the reason
loan growth has remained sluggish: a limited appetite from
borrowers.
The drop in commercial lending growth has weighed on broader
annual loan growth at banks, which stands at 3.2%, down from 7.3%
last November.
Bankers have been predicting for months that growth would pick
up. BB&T Corp. CEO Kelly King said late last year that there
was "a huge pent-up demand" from commercial clients who wanted to
invest in their businesses after years of holding off. "They're
driving trucks with 250,000, 300,000 miles," Mr. King said.
But other industry observers say the lower growth rates are
likely here to stay. Even some banks are getting less optimistic --
at least in the short-term.
"This may just be the new normal," says Credit Suisse Group AG
banking analyst Susan Roth Katzke.
Analysts have trimmed earnings expectations for banks including
BB&T and U.S. Bancorp since the banks signaled last month that
loan growth has been softer than expected.
BB&T, for example, said in July that it expected overall
loans to be up 1% to 3% in the third quarter compared with the
second quarter. In mid-September, the bank walked that back, saying
it expected loan growth to be slightly down in that period.
But BB&T executives are hopeful of a ramp-up in business
borrowing in the longer run, in particular if a U.S. tax overhaul
happens. Small and medium-size businesses, Mr. King says, are still
"much more confident, much more optimistic."
The loan-growth slowdown is noteworthy because it is occurring
when many metrics show the U.S. economy strengthening. Unemployment
is low, broader stock-market indexes have reached records and
metrics of small-business confidence are up.
BB&T, like a number of its peers, said last month that loan
customers recently shifted to borrowing from the bond market to
take advantage of low rates there. Bond issuance by nonfinancial
firms in the U.S. is up 6% so far this year, according to data
provider Dealogic.
But rates have ticked up recently making it more expensive to
borrow in some cases. Some firms took advantage of low rates by
borrowing in prior years, so they may not need to jump into the
lending market anytime soon.
Thomas Deas, chairman of the National Association of Corporate
Treasurers, doesn't expect companies to binge on debt if the
current economic recovery continues at its relatively slow pace,
noting that many companies have borrowed what they need for the
current environment. "They already did the borrowing when rates
were lower," Mr. Deas said.
Others say the prolonged slowdown in commercial-loan growth may
simply be a function of the metric returning to its normal level in
recent decades.
Since 1973, commercial loan-growth has been closely correlated
to gross-domestic-product expansion, according to Credit Suisse's
Ms. Katzke. The recent slowdown is likely a function of the metric
returning to its historic relationship with GDP, she said.
Jack Micenko, an analyst with Susquehanna Financial Group,
looked at capital-expenditure data as a share of GDP after World
War II and found that its current level is about normal at around
16%. That casts doubt on the idea held by some bankers that
companies have broadly held off on investing.
"Are there some owners driving trucks with hundreds of thousands
of miles on them? Sure," says Mr. Micenko. "But I'm not sure how
substantial that is compared to the market broadly."
(END) Dow Jones Newswires
October 10, 2017 05:44 ET (09:44 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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