With data available through most of June, balance sheet themes for U.S. banks in the second quarter appear mostly in place.
A surge in lending that started in March has started to reverse sharply as corporations pay down credit lines, borrowing under the government's small-business relief program tapers and banks tighten underwriting. Deposits continue to pile up as businesses and consumers maintain large, precautionary balances and as bond buying by the Federal Reserve floods the system with cash.
For bank net interest margins, that translates into a "tug of war" between lower-yielding liquid assets and easing funding costs, Compass Point analyst David Rochester wrote in a June 26 note.
Commercial and industrial, or C&I, loans fell 1.5%, or $45.69 billion, during the week ended June 17, according to the Fed's seasonally adjusted data on commercial banks operating in the U.S. That is the fastest weekly rate of decline in more than 45 years.
C&I borrowing ballooned in March as the dizzying drop in economic activity caused by the coronavirus pandemic set in and corporations built up large cash cushions. But businesses have been paying banks back as debt capital markets have opened up.
The speed of the credit line paydowns led some banks to cut their forecasts. Fifth Third Bancorp expects net interest income in the second quarter to drop between 3% and 3.5%, a change from its original forecast calling for net interest income to be about flat with the first quarter.
Comerica Inc. disclosed on June 9 that line utilization among its customers had fallen back to 51.3% as of the end of May, down from a spike to 56.7% at the end of March. The bank reported that an important driver behind the recent drop was decreased usage by auto dealers amid manufacturing interruptions, but CFO James Herzog said he expects business line utilization to continue falling if borrowers remain confident that they can access debt markets.
Whether this happens late in the second quarter or in the middle of the third quarter, "sometime this summer we should see those pretty much get back to normal," he said.
Overall, C&I loans declined 5.1% from a peak on May 13 to $2.934 trillion on June 17, and total loans declined 1.9% from a peak on May 6 to $10.69 trillion. Excluding roughly $500 billion of Paycheck Protection Program loans, loan growth has been modest since late February, before the pandemic started to impact the economy. Total loans are less than 1% higher and C&I loans are about 2.6% higher.
During the week ended June 17, consumer loans also continued a descent that began in March and that has amounted to a contraction of more than 5% so far in the second quarter. Consumer borrowing has been impacted by tighter underwriting among banks wary about taking on new customers amid record-setting unemployment, and a sharp slowdown in spending that has started to ease.
Because the bulge in corporate line borrowing that began in March is still unwinding, and because of the addition of about $500 billion in PPP loans since April, average loan levels in the second quarter are running well ahead of the first quarter. But at an interest rate of 1%, PPP loans generate relatively modest spread income, and the more attractive fees they carry will generally not be recognized as interest income until the loans are forgiven.
The continuing torrent of deposits should provide a powerful boost by making it easy to lower funding costs. But banks are channeling much of the flow into their own holdings of cash and other liquid assets, which do not earn much.
Total deposits increased 10.1% from March 25 to $15.565 trillion at June 17, while large time deposits, which are typically costlier to banks, fell 0.3% to $1.747 trillion.
Comerica's Herzog attributed more than $6 billion of deposit growth in the second quarter at the bank in part to federal pandemic relief disbursements, and to customers "conserving" the cash they have received. Another major factor, Herzog said, is the raw growth in the Fed's balance sheet, which has jumped from about $4 trillion in February to about $7 trillion now.
"That funding is going to stay in the system for a long time," he said.