Tax cuts. Deregulation. An upward trajectory for the U.S. economy.
Heading into 2018 and through the early months of the year, bankers said clarity on those fronts would bolster optimism among their commercial clients and, ultimately, lead to stronger loan growth.
Business owners, the thinking went, would see lower taxes and eased regulation translate into greater economic activity, and by extension, they would borrow to invest in their own growth to keep pace with advancing U.S. gross domestic product.
Much of that has played out as expected.
U.S. businesses this year are operating with a top corporate tax rate of 21%, down from 35%. The Republican-controlled Congress and White House are steadily trimming regulations. U.S. GDP grew at a rate slightly above 2% in the first quarter, according to federal data, but the Atlanta Federal Reserve projects that second-quarter growth will approach 5%.
|BofA CEO Brian Moynihan|
Yet, as the second quarter nears its close, major American banks are seeing only modest increases in business borrowing, following a weak start to the year. Total loans at U.S. commercial banks grew 0.5% during the first quarter, and they dipped by 0.1% at the 10 largest banks, according to an S&P Global Market Intelligence analysis.
Bank of America Corp. Chairman and CEO Brian Moynihan, speaking at a conference in late May, said "the business community is very optimistic about deregulation and tax reform," and he said that is starting to nudge loan demand up some. But he sees the operating environment as just "fairly constructive" for lending.
Wells Fargo & Co. CFO John Shrewsberry said at a June conference that the bank and some competitors are talking about upticks in the pipeline. But, he added, "I'm not really seeing robust loan growth come through even if people are busy competing or planning for deals or other things that might result in loan growth tomorrow or a month from now. So I'll be interested to see how the industry reports that" with second-quarter earnings results.
Notable 2018 loan growth is now a hope for the second half of 2018, Morningstar bank analyst Eric Compton said in an interview.
Compton said banks as a group have gradually loosened credit standards and competed aggressively on commercial loan pricing over the past year. "They are pushing for growth," he said. "So I don't think the issue is banks holding back."
Rather, he and other analysts say, business owners are likely using higher cash balances — the result of tax cuts — to finance capital expenditures in the first half of 2018.
Sandler O'Neill & Partners bank analyst Jeffery Harte said that historically in prosperous eras businesses tend to use cash first. But as economic growth continues, they eventually burn through stockpiles and start to borrow to invest even more. He expects that will be the case again, though estimating the timing of meaningful loan growth remains a guessing game.
"There usually is a pretty tight correlation between GDP and business lending, but there can be some lag with the lending," Harte said in an interview. "I think you are hearing from the big banks that there are at least signs that things are picking up. ... But it definitely is too soon to call it a rebound yet."
All of that noted, Harte does not expect big banks to take outsized risks on lending just to show growth. With lower tax rates boosting their profitability, banks do not have to generate major lending gains to continue to produce strong bottom lines this year. And he said bankers are mindful of lessons learned during the last financial crisis — namely that low-quality loans come back to haunt them.
JPMorgan Chase & Co. Chairman and CEO Jamie Dimon, speaking at a June conference, addressed that reasoning. "We're not going to do dumb things in credit, because that is still the biggest risk a bank bears," he said. "We don't tell our bankers, 'Loan growth, loan growth.' We tell our bankers, 'Cover more clients, do a good job, do credit rigorously.'"