US banks post solid loan growth in Q1'22 as uncertainties build

Commercial banks in the U.S. notched another three months of healthy loan growth in the first quarter of 2022, though the potential for an economic downturn has raised concerns about how long the momentum can last.

The performance in the first quarter builds on a sharp rebound in lending in the fourth quarter of 2021, and delivers on banks' guidance that underlying trends remained strong despite what appeared to be a slow start in January and February. Banks have continued to add to credit lines even as loan growth has returned, according to data from S&P Global Market Intelligence, with unused commitments across the industry up 1.4% in the second half of 2021 to $9.042 trillion even as loans increased 3.5% to $11.245 trillion.

In the 2022 first quarter, loan growth continued to be broad based, spanning commercial and consumer categories. After seasonal adjustments, commercial and industrial loans increased 1.0% from Dec. 29 to $2.512 trillion at March 30, according to weekly data from the Federal Reserve. Consumer loans, excluding mortgages, were up 5.0% to $1.732 trillion. The first quarter is usually slow for consumer lending, and without seasonal adjustments, consumer loans were up 0.8%.

Overall, seasonally adjusted loans grew 2.0% from Dec. 29 to $10.961 trillion at March 30, or 1.1% without seasonal adjustment. In intraquarter updates in early March, banks like U.S. Bancorp and Truist Financial Corp. said commercial loan demand remained robust, with borrowers looking to rebuild inventories and make capital expenditures. In guidance on March 31, PNC Financial Services Group Inc. maintained its forecast for full-year average loan growth of 10%.

"We are very constructive" on loan growth trends in the first quarter, said Ebrahim Poonawala, an analyst at Bank of America. Still, he expects investors to closely watch for color from banks on client sentiment in earnings reports that start on April 13, and whether shockwaves from events like Russia's invasion of Ukraine have made a tangible impact.

"Did activity levels or customer loan demand take a hit because of the war, because of these macro concerns or not? That's a little bit of an unknown right now," he said. He added that there is a good case that the "reopening tailwind" persists as the economy moves past pandemic disruptions.

"If supply chains are easing, inventories are being rebuilt, that's going to drive loan demand," Poonawala said. "The employment backdrop remains strong."

There is also the prospect that the aggressive series of interest rate hikes the Federal Reserve has signaled could ultimately cool off loan growth.

In a note on April 11, analysts at Raymond James found that consensus analyst estimates project that loan growth will accelerate in 2023 from 2022 at about 40% of the banks they cover. Against a backdrop where economists have moved in the opposite direction and trimmed their economic growth forecasts, these banks could be set up for "the sharpest estimate revisions" if the outlook continues to deteriorate, the analysts said.

Loan growth has been healthy and higher rates should support earnings, Raymond James analyst Michael Rose said in an interview. "But there's questions as to after this quarter, how much higher can out-year 2023 estimates go if consensus is largely going to reflect the forward curve, pretty strong loan growth and credit that, at least when you look at consensus numbers, looks to be relatively pristine through 2023."

Deposit growth also slowed in the 2022 first quarter, according to the weekly Fed data, as the central bank ended its quantitative easing bond purchases and set out some of the parameters for shrinking its balance sheet.

Seasonally adjusted deposits increased 0.7% from Dec. 29 to $18.112 trillion at March 30, compared with a 2.2% increase from Sept. 29 to Dec. 29. Meanwhile, large time deposits, which have fallen sharply since early 2020, increased 2.2% from Dec. 29 to $1.454 trillion at March 30.

"Bank net interest margins will reset higher" as rates go up, Poonawala said, but the speed of the rate increases on deposit costs could blunt some of the benefit.

Christopher McGratty, head of U.S. bank research for Keefe Bruyette & Woods, said high levels of liquidity at banks, and low ratios of loans to deposits, should help restrain the sensitivity of deposit prices initially.

"There's a lot of flexibility in these balance sheets," he said. "Now the real tricky part is, if you see 50 basis-point chunks of rate hikes, I do think you're going to see banks have to respond quicker."