US banks’ portfolios of business loans all but stopped growing in the second half of 2019, as an industrial slowdown crimped loan demand and larger businesses took advantage of cheap financing available in the capital markets.
While commercial and industrial loans held by US banks had grown 1.6 per cent by mid-December, to $2.4tn, all of that growth occurred in the first half of the year, and most of that at midsized and small banks, according to Federal Reserve data.
The pattern is still more pronounced in commercial real estate lending, with some growth persisting on smaller bank balance sheets, while the amount of CRE loans held at the largest banks has begun to decline. In many cases, CRE loans are regarded as business loans by another name, as businesses borrow against their real estate to finance investments or operations.
Analysts say this year’s decline in growth reflects the slowdown in the US industrial economy. In November, the Institute for Supply Management’s survey showed contracting US manufacturing activity for the fourth straight month. For much of the latter half of the year the trade dispute between the US and China has weighed on business sentiment.
Jennifer Piepszak, JPMorgan Chase’s chief financial officer, said confidence among chief executives had improved since the summer but uncertainty remained. “Trade would, of course, top the list there, but the elections in the US will contribute to an uncertain environment in 2020,” she said at a conference this month.
There have also been low overall levels of capital investment. In the fourth quarter, capital expenditure by S&P 500 companies is set to rise by just over 1 per cent, according to Refinitiv. That compares to growth of over 12 per cent a year before, when tax incentives helped boost spending.
Capex is the key driver of big bank lending, and “we’re just not seeing that big capex coming through”, said Brian Klock, bank analyst at Keefe, Bruyette & Woods.
There has been minimal growth at the 25 largest US banks by assets year-to-date. Brian Foran of Autonomous Research attributed the growth differential between large and small banks to the effect of the trade tensions, saying that “tariffs weigh much more heavily on big companies”, which bank with larger institutions.
Banks may also be losing some lending opportunities with larger companies to the junk bond market, where borrowing costs have fallen. US junk bond issuance is up almost 60 per cent in 2019 versus 2018, to $263bn, according to Dealogic.
But even smaller banks, whose clients are less likely to turn to the bond markets, are seeing a slowdown in loan demand. Speaking at an industry conference this month, executives from Comerica, a midsized bank specialising in business lending, said it was seeing a slowdown in middle-market lending in the fourth quarter, offset by better results in commercial real estate and mortgages.
The chief executive of Zions Bancorporation, another midsized bank focused on small businesses, echoed that sentiment, saying that “we’re all seeing [loans] slowing across the industry”.
Low demand for credit from energy companies was another important contributor to the overall slowdown, said Mr Foran of Autonomous, as natural gas prices have fallen to extremely low levels in 2019.
Fed data showed a similar slowdown in overall business lending 2017, but it was followed by a strong recovery last year.
A saving grace for the banks in 2019 has been the vigorous American consumer. Richard Fairbank, chief executive of Capital One, one of the largest card-issuing banks in the US, said this month that he remained “very bullish” about adding new credit-card customers, even late in the economic cycle, and that loan delinquencies are “strong and stable”.
Growth in unsecured consumer loans held by US banks have slowed in 2019, but were still growing at a 4 per cent annual rate as of November, according to the Fed.