Will Business Spending Spoil Bank Earnings Season?
October 13 2016 - 10:50AM
Dow Jones News
Business lending abruptly downshifted in the third quarter, a
puzzling move that may weigh on upcoming bank earnings.
For some time, business loans, also known as commercial and
industrial loans, have been one bright spot for otherwise
growth-starved banks, both large and small. But such lending fell
by 0.1% in the third quarter, Federal Reserve data show.
Although small, the contraction from the prior quarter is the
first such drop in six years, according to Morgan Stanley. That
could drag on third-quarter bank earnings growth. Bank results are
generally expected to be solid if not exciting. The biggest banks,
such as J.P. Morgan Chase & Co., begin reporting Friday and
into early next week; regional banks will report results over the
next few weeks.
Possibly offsetting the drop-off: Other types of loans—including
commercial real estate, mortgages and credit cards—grew in the
quarter from the prior quarter, according to Fed data.
Bankers are hoping the sudden lurch in business lending is a
blip. One point in their favor: the drop came shortly after Britain
voted to leave the European Union, roiling markets and denting
business confidence. After late August, business loans outstanding
started recovering. Indeed, year-over-year growth rates for
business loans remain positive, and that also rose through
September.
So far, bankers are cautious and perplexed. "We see it slowing
down over the course of the quarter, we don't know why," U.S.
Bancorp Chief Executive Richard Davis said of commercial lending at
his bank's investor day in September. "Is it affected by the
pending election? Is it because of the Brexit? What is it?"
BB&T Corp. Chief Executive Kelly King in September
attributed the slowdown to anxiety that may dissipate after the
election. Mr. King says some of his clients have "trucks with
250,000 miles, 300,000 miles" and "20-year-old computers" but
aren't investing in upgrades because of uncertainty about the
future.
Other bank executives have hypothesized that seasonal changes in
car dealership borrowing and less demand from energy companies may
also be factors.
"You hear a lot of different anecdotal answers from customers,"
Grayson Hall, the chief executive of Birmingham, Ala.-based Regions
Financial Corp., said in September, "Anyone's guess is as good as
mine."
A drop in this type of lending, which consists of banks'
non-real-estate loans to businesses, adds to banks' profitability
woes. Overall bank profits have been under pressure for some time
thanks to the lackluster economic recovery and superlow interest
rates.
The gloomier scenario is that the business-lending metric is a
sign of a broader economic slowdown that lasts beyond the quarter,
said Barclays PLC analyst Jason Goldberg.
That could have further-reaching consequences, especially when
it comes to the Federal Reserve and its next move on interest
rates. Last December, relief seemed to be in sight for banks when
the Fed raised rates and said it expected to continue hikes in
2016.
Such a move could be expected to boost banks' net-interest
margins, or the profit margin they make by borrowing money from
depositors and lending it out. But a further Fed increase has
failed to materialize.
Until the Fed does so, banks must rely on loan growth to try to
increase net interest income. Double-digit rates of commercial-loan
growth in recent years helped with that effort.
The stall in commercial lending growth has prompted analysts to
cut earnings expectations for some lenders. Morgan Stanley, for
instance, last week trimmed estimates for the third quarter and
2017 for a number of banks including Comerica Inc., KeyCorp and
Zions Bancorp.
Individual banks' loan growth often deviates from the broader
Fed data, but many of the large U.S. lenders have also forecast a
slowdown in these loans. Bank of America Corp., for instance, said
loan growth had moderated in the third quarter because of less
mergers and acquisitions activity and companies tapping less of
their available lines of credit.
Write to Rachel Louise Ensign at rachel.ensign@wsj.com
(END) Dow Jones Newswires
October 13, 2016 10:35 ET (14:35 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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