Following a year of muted demand, bank loans to businesses picked up steam in the final weeks of 2018, and barring a sudden economic downturn, bankers and analysts expect the trend to continue well into 2019.
Consumer lending could also be a bright spot in the year ahead, as low unemployment rates mean that most consumers — save for a few hundred thousand federal workers affected by the government’s three-week-old partial shutdown — are getting regular paychecks and appear eager to spend them.
Commercial real estate lending, the bread-and-butter business for many smaller and regional banks, could pose challenges for banks in 2019 due to intense competition from nonbank lenders, rising delinquency rates and other factors. Mortgage lending could also be a slog this year, due to rising interest rates and tight housing supplies in many major markets
Yet the slowdown in real estate lending is not dampening the moods of bankers and bank investors.In a recent survey of executives and investors conducted by Barclays, 94% of respondents said they expect loan growth to accelerate in 2019. Here is a closer look at what to expect in four key loan categories in the coming year.
Commercial and industrial
After a year’s worth of waiting for a rebound that never materialized, signs finally emerged in late 2019 that businesses were ready to start borrowing again.
For the week ending Dec. 26, commercial and industrial loans at large, domestically chartered banks rose $26.5 billion, or 2.1%, to $1.27 trillion from a week earlier, according to the Federal Reserve data. That was the second-largest week-to-week increase in history, according to Barclays.
In addition, several bank CEOs said at an industry conference in December that commercial loan pipelines are bulging.
For many bankers, it seemed like the time would never arrive. After all, the federal corporate tax cut in December 2017 was supposed to stimulate economic activity and spur more borrowing. But C&I loans at the 25 largest banks fell from the second quarter to the third quarter, according to Fed data compiled by Wedbush Securities.
Chris Giamo, the head of the commercial bank at the $294 billion-asset TD Bank, said that he expects the surge of activity at year-end to continue into 2019.
“We definitely saw demand pick up in the fourth quarter,” Giamo said. “There is a lot of optimism and most companies we talk to believe they are going to have revenue growth this year.”
To be certain, some of the issues that suppressed commercial loan demand last year are still present, such as the trade war between the U.S. and China. Rising interest rates may also discourage companies from borrowing.
It’s also true that many companies remain flush with cash. Many bankers said that business executives were reluctant to borrow in 2018 since the tax cut produced a cash windfall. Even if they have spent most of their tax savings, many businesses have also generated plenty of cash through expanded operations, said Steve Shelton, the CEO of the $955 million-asset California BanCorp in Oakland.
“Our clients are sitting on extraordinary deposit balances,” Shelton said.
This month, the U.S. entered the 115th month of its current economic expansion, the second-longest in history, Barclays analyst Jason Goldberg wrote in a Jan. 2 research note. Many investors believe it’s bound to end soon, he said.
“There is a concern that the recent recession talk becomes a self-fulfilling prophesy,” Goldberg said.
If C&I lending once again slows, some banks may cut corners on terms and rates to win new business. Some of that has already happened, according to Moody’s Investors Service. The number of banks that loosened underwriting standards on C&I loans to companies with at least $50 million in annual sales rose to about 20% in the third quarter, from about 8% a year earlier.
‘There is a concern that the recent recession talk becomes a self-fulfilling prophesy,’ said Barclays’ analyst Jason Goldberg.
Still, business leaders themselves are optimistic, something that bank executives frequently point out when they forecast C&I loan growth.
About 91% of small and midsize companies expect to maintain or increase their capital expenditures this year, according to a survey of conducted by JPMorgan Chase, because most believe that revenue and profits will increase this year.
“We’ve seen C&I lending pick up in the last few weeks and it looks pretty significant to me,” said Jim Glassman, senior economist at JPMorgan Chase. “We’ve all been expecting this to happen.”
Consumer loans have been surging of late and could be a source of growth this year, thanks to low unemployment rates and higher wages. But two factors may act as a buffer — an increase in delinquency rates and consumers trying to clamp down on their own debt.
According to the Fed’s H.8 report, consumer loans have increased in nine of the past 10 weeks. The category reached an all-time high, for large, domestically chartered banks, of $398.9 billion in the week ending Dec. 26, according to Barclays.
But delinquency rates have also ticked up recently, which has led some banks to tighten underwriting standards, according to recent reports from the American Bankers Association and the debt-rating agency DBRS.
“Banks are taking a cautious approach to any type of loans they extend. They know the economy is slowing a bit and they’re going to be careful of that,” James Chessen, the ABA’s chief economist, told American Banker this week.
While their discipline in underwriting could crimp loan growth, banks are taking other steps to prevent credit-quality deterioration. In credit cards, Citigroup and JPMorgan Chase have cut back on rewards programs and have reduced the balances of 0% teaser-rate cards
In auto loans, many banks have begun to focus only on prime borrowers, leaving the subprime market to nonbank lenders, a trend that’s expected to continue this year, according to a recent Experian report.
Meanwhile, some banks have become downright skittish about making unsecured personal loans. Roger Hochschild, the CEO of Discover Financial Services, said in October that those loans are tricky to underwrite.
“It’s not like a card, where you have ongoing data and you monitor it,” he said.
Commercial real estate
The business of commercial real estate lending at banks has been in a prolonged slump. Expect that to continue in 2019.
A range of factors are behind the CRE slowdown.
Nonbank lenders such as insurance companies have aggressively pursued the permanent mortgages on office buildings and other large commercial properties. Early-stage delinquency rates have recently increased, causing some banks to tap the brakes.And many large tenants are using less space as telecommuting gains popularity and shared-workspace firms like WeWork gain traction.
Some recent developments have provided a glimmer of hope for CRE lenders. A new federal rule may encourage more private development in low-income communities designated as Opportunity Zones. That could pave the way for expanded bank lending.
New York Community Bancorp, which specializes in multifamily loans, recently had an enforcement action terminated that had limited its ability to expand CRE lending.
And Bank of America recently said that it sees the pullback in CRE lending by other banks as an opportunity. Such a move from BofA could prompt other banks to rethink their CRE strategies and also become more aggressive in the space.
A rising-rate environment is typically bad news for mortgage lending, but the recent stock market volatility may be a silver lining for some homeowners and lenders.
Once the Federal Reserve began raising rates in December 2015, the market for mortgage refinancings declined dramatically. Homeowners have been loath to give up the rock-bottom rates that they locked in during the years of near-zero rates. That’s led to a decline in mortgage-banking revenue at many banks.
But in recent weeks, a rally in U.S. Treasuries amid the decline in stocks has dragged down mortgage rates, potentially creating an opening for some borrowers to refinance, according to Bloomberg. The average rate for a 30-year, fixed-rate mortgage dropped to 4.51% during the week of Jan. 3, according to Freddie Mac. That’s down from a recent high of 4.94% in November.
Still, there are few other reasons for bankers to get excited about the mortgage market. Fannie Mae recently forecast a decline in originations to $1.61 trillion this year from $1.63 trillion in 2018.
‘The mortgage banking industry remains at a low point,’ said HomeStreet CEO Mark Mason.
New-purchase volume is expected to remain depressed, as housing supply remains tight and prices continue to rise.
“The economy is running in its second-longest expansion ever and the housing market has grown in tandem with it, which has led to a substantial increase in home prices,” Sam Khater, chief economist at Freddie Mac, wrote in a report last month. That’s “causing affordability issues for some potential homebuyers.”
Reflecting those conditions, the Fannie Mae Home Purchase Sentiment Index dropped in December to its lowest point of the year.
In addition to job cuts, the $7 billion-asset HomeStreet closed or reduced space in 21 offices last year “given the persistent shortage of new and resale housing and increased interest rates reducing demand for both purchase and refinance mortgages,” Chairman and CEO Mark Mason said during an October conference call.
Finally, the government shutdown could also hamper the mortgage market, if it persists over the coming weeks or months. The Federal Housing Administration, for example, would be likely significantly curtail its processing of government-backed loans.
And reduced operations at the Internal Revenue Service may lead some banks to stop processing loans, as they won’t be able to obtain needed tax documentation to help with income verification.
As it turns out, refinancing may be the only bright spot for mortgages in 2019.
“The mortgage banking industry remains at a low point,” Mason said.