Heading into Q2 earnings, US bank loans flat as deposits level off

Banks are optimistic that a strong economic recovery will translate into loan growth, but weekly Federal Reserve data covering most of the second quarter suggests that many will have to wait a while longer.

Meanwhile, deposit growth continued to be robust during the period but cooled around the middle of May as the Fed sweetened the terms of an alternate repository for the trillions of dollars in liquidity that the central bank has injected into the financial system since the pandemic hit in early 2020. Some analysts expect the Fed's changes will encourage significant deposit runoff in the months ahead as investors boost their direct holdings of Treasurys.

Total commercial bank loans in the U.S. were roughly flat during the week ended June 23 at $10.332 trillion, leaving them also about flat with their level at March 31. Portfolios have been depleted by persistent declines in commercial and industrial lending, where balances fell $102.65 billion, or 4%, from March 31 to $2.462 trillion at June 23.

Consumer loans excluding mortgages moved up $37.62 billion, or 2.5%, to $1.569 trillion over the same period, with a $13.4 billion, or 1.8%, increase in credit card loans to $757.38 billion. The seasonally adjusted weekly Fed figures are based on reports by a sample of 875 banks combined with estimates for the other banks using quarterly regulatory filings.

The data lines up with late-quarter updates delivered by big banks such as Wells Fargo & Co., which said on June 15 that credit demand remained soft because of factors like high levels of client cash and supply chain disruptions that reduce inventory financing needs.

Low card balances led JPMorgan Chase & Co. and Citigroup Inc. to give downbeat guidance at around the same time for net interest income in the second quarter, though both banks have said they expect card loan growth to reappear later this year.

The growth in credit card loans in the Fed data started in May, and analysts are divided about whether it reflects an inflection. "Given the huge pent-up demand and recent robust spending trends, there is high potential for loan growth to be better" than historical patterns would imply, Keefe Bruyette & Woods analyst Sanjay Sakhrani said in a report on July 5.

By contrast, Goldman Sachs analyst Ryan Nash argued in a July 6 report that the May trends were likely a "head fake" driven by an increase in spending by cardholders who pay off their balances every month. Nash said that a year of tightened credit standards, which issuers have said are returning to pre-pandemic norms, have shifted portfolios away from borrowers who tend to carry balances month to month.

On the liability side, industrywide deposit levels have held about steady since the middle of May after posting strong growth early in the quarter. At June 23, deposits totaled $17.060 trillion, compared with $17.069 trillion at May 12 and $16.709 trillion at March 31.

Deposit inflows have ballooned balance sheets since the start of the pandemic, forcing some banks to wrestle with leverage constraints and prompting them to deflect clients' non-operational cash into alternatives such as money market funds.

Recent moves the Fed made to support the functioning of short-term money markets and keep interest rates from moving too close to the bottom of its target range of zero percent to 0.25% appear to have helped arrest the growth, however.

The Fed substantially increased its per-counterparty limit for overnight reverse repurchase agreements in March, and then it increased the rate paid under the facility from zero to 5 basis points after its policy meeting on June 15 and June 16. Usage of overnight reverse repo surged from almost nothing in early March to levels exceeding $700 billion since June 17. That has reduced the need to fund the Fed's balance sheet with bank reserves, which have been jagged but kept to a range of roughly $3.8 trillion to roughly $4 trillion since late March.

While the Fed is still adding $120 billion of bonds to its portfolio each month to keep overall rates low and support the recovery, the Fed's reanimated reverse repo facility could continue to help keep a lid on deposits. In a July 1 note, Credit Suisse money market strategist Zoltan Pozsar predicted that money market funds will shift more than $1 trillion from existing holdings of Treasury bills over the next couple months in favor of the slightly higher yield on reverse repo with the Fed. That would force institutional investors to use an equivalent amount, also more than $1 trillion, of deposits to buy bills as money market funds cut their holdings.

That sort of shift could alter the excess liquidity dilemma for banks as a major outflow of deposits would mean less cash to deploy. At the same time, rapid, massive rotations among various sectors could strain money markets.

Through the most recent weekly data, at least, banks in the aggregate appear to have continued to be relatively cautious about boosting their investment portfolios.

Banks' securities holdings increased $225.08 billion, or 4.5%, from March 31 to $5.242 trillion at June 23. That compares with a $303.92 billion, or 8.7%, increase in cash over the same time to $3.8 trillion.