Loans sag, balance sheets build at US banks in Q1'21

Lending appears to have contracted again across U.S. banks in the first quarter of 2021, as soft credit demand continues to blemish an otherwise improving outlook for the industry.

Seasonally adjusted loans fell by $42.2 billion, or 0.4% from Dec. 30, 2020, to March 31, according to weekly data from the Federal Reserve. That marks the third quarter in a row of seasonally adjusted declines, following an epic surge in lending during the first half of 2020 that was driven by corporations seeking to build cash reservoirs early in the pandemic.

Banks including U.S. Bancorp, Huntington Bancshares Inc. and Comerica Inc. reported in March that lending had been weak for the first couple months of the quarter, but expressed optimism that demand will pick up later in the year as the economic recovery matures. Some analysts remain skeptical, however.

While growth of 8% to 10% in GDP "for the rest of 2021 would suggest a lending boom," analysts at BofA Global Research wrote in a note on April 12 previewing first-quarter earnings reports, "we think the risk of disintermediation from non-bank lenders [and capital markets] could spoil the party for bank shareholders." They added, "We think management's tone on calls will be cautiously optimistic, but we do not see any positive changes in PPNR (pre-provision net revenue) guidance at this point, save for mortgage banking."

While anemic lending is likely to weigh on net interest margins, bank balance sheets have continued to expand rapidly, generating liquidity that can be put to work and help provide an offset to net interest income. Seasonally adjusted deposits increased $575.29 billion, or 3.6%, from Dec. 30, 2020 to March 31, including a spike during the week that ended March 17 that appeared to reflect the disbursement of a large number of household relief checks under President Joe Biden's pandemic aid package.

Seasonally adjusted deposit and balance sheet growth in the first quarter of 2021 was stronger than it was during either of the last two quarters of 2020, though it remained far off levels hit during the second quarter of 2020 when the Fed conducted a massive bond-buying intervention to stabilize financial markets and corporations drew hundreds of billions of dollars against credit lines.

With business line utilization appearing to remain low after companies tapped capital markets to pay off money they borrowed from banks early in the pandemic, year-over-year commercial and industrial loan growth hit negative 8.2% during the week that ended March 31. Commercial and industrial loans are also being influenced by the push and pull of the Paycheck Protection Program. As of April 1, $209.1 billion of $521.2 billion of PPP loans originated in 2020 had been forgiven, according to the Small Business Administration. As of April 11, $232.8 billion of PPP loans had been approved in 2021.

Year-over-year deposit growth was still high at 16.9%, though the year-over-year comparison has moderated as the calendar moves past the anniversary of the start of last year's surge.

While loan growth appears to have been uninspiring across the industry, small banks have fared relatively well according to the Fed data. Seasonally adjusted loans at the 25 banks with the most assets declined 1.3% from Dec. 30, 2020 to March 31, compared with a 1.3% increase across other banks. The smaller banks also posted 4.8% deposit growth during the same time, compared with 3.1% for the 25 largest.

Banks such as First Republic Bank and Signature Bank, which are sizeable but fall outside of the top 25 by assets, appear likely to buck the general trend in lending and continue to post strong growth. Both recently completed additional common equity offerings.

Seasonally adjusted consumer loans did move up 1.2% across the industry from Dec. 30, 2020 to March 31, with credit card loans increasing 0.8%. Despite the potential for the latest round of pandemic relief checks and supplemental unemployment insurance to restrain consumer credit demand, some analysts have interpreted the recent stabilization as suggestive of "green shoots" that could portend future growth.

"More states are clearly re-opening at this point and travel is typically booked a few months in advance," Compass Point analyst William Ryan said in a note on April 9. "We had initially expected to see some signs of a turnaround in the April/May time frame given a near-term dampening impact of tax refunds and stimulus checks, but it may actually be coming slightly sooner than we anticipated based on the data."