Big bank lending slump likely to persist into 2024

Loan portfolios at big US banks nearly flatlined in the third quarter, and analysts expect more softness ahead as high interest rates restrain demand and banks tighten their lending standards.

Median sequential loan growth was 0.1% across the 15 biggest banks during the period, a downshift from an already weak second quarter, according to data from S&P Global Market Intelligence. Median commercial loans dropped even lower from the second quarter, while consumer loans posted modest increases.

Executives are likely to be downbeat about the growth outlook in upcoming mid-quarter business updates, as "banks remain in the midst of rationalizing their asset sizes, and there is little demand, anyway," Piper Sandler analyst R. Scott Siefers said in a Nov. 29 note.

"Loan growth should remain slow for the rest of 2023 and into 2024, as banks exercise caution and demand slows," analysts at Jefferies said in a Nov. 17 note. "Many banks expect loans to be flat-to-down for the next few quarters."

Commercial contraction

Banks have reported tightening commercial and industrial (C&I) loan standards for six consecutive quarters and weaker demand for five consecutive quarters, according to a Federal Reserve survey of senior loan officers.

As such, C&I loans dropped a median 1.5% sequentially across the biggest banks in the third quarter, according to Market Intelligence data.

Total seasonally adjusted C&I loans across domestically chartered commercial banks fell 0.1% from June 28 to Sept. 27, a period that roughly corresponds to the third quarter, according to weekly data from the Fed. They contracted by another 0.1% through Nov. 15, according to the most recent data.

Commercial real estate tightening has generally been even more severe as banks try to manage through strains, particularly in the office market.

Commercial real estate loans declined a median 1.4% sequentially across the big banks in the third quarter. That includes a decline of 5.8% at Capital One Financial Corp., which completed the sale of about $888 million of office loans during the period, and a 10.4% decline at Goldman Sachs Group Inc., which has been cutting its office exposure as it recognizes sharp losses.

Consumer pullback

Conversely, big banks notched a median 0.4% sequential growth in consumer loans in the third quarter.

While relatively strong, credit card loan growth is also slowing as lenders absorb increasing net charge-offs and tighten standards. Seasonally adjusted credit card loan growth across domestically chartered commercial banks was 0.5% from Sept. 27 to Nov. 15, according to weekly Fed data, compared with 2.6% from June 28 to Sept. 27.

The data also reflects pullbacks in other consumer loan categories. Citizens Financial Group Inc., for instance, posted a 4.1% sequential drop in its consumer loans in the third quarter. The bank said in July that it was establishing a $13.7 billion portfolio of low-yielding indirect auto and purchased consumer loans.

The portfolio fell to $12.3 billion in the third quarter, and the bank projected that it would decline to $4.7 billion by the end of 2025.