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Another quarter of soft loan growth at large banks sets up 'do-or-die' Q4

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Another quarter of soft loan growth at large banks sets up 'do-or-die' Q4

Large banks are reporting sluggish loan growth figures for the third quarter, citing persistently high paydown activity and an unwillingness to chase competition from smaller banks and nonbanks.

The earnings reports match the Federal Reserve's aggregated data for all commercial banks. The dataset showed total loan growth of just 2.0% in September for the top 25 banks by size. Loan growth for the large banks has been stuck at that level for the last year. By contrast, the small banks reported year-over-year growth of 9.2%, up from 6.3% growth in September 2017.

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With the Fed's data published on a weekly basis, analysts were expecting soft loan-growth figures for the nation's largest banks, and the results have been soft. At Bank of America Corp., total loans were just 0.3% higher than the year-ago quarter. Management pointed to high levels of cash at corporations — boosted by the recent corporate tax cut and repatriation holiday — reducing the need for credit. Executives also pointed to robust capital markets offering attractive alternatives and nonbank competitors stretching on aggressive loan structures, something the bank would not chase.

"We try to play down the middle, and we will continue to do that," said Chairman and CEO Brian Moynihan.

Analysts attributed the soft loan growth figures to some declines in large bank stocks since the companies beat consensus estimates on a net income basis. In an Oct. 15 note, Brian Kleinhanzl, an analyst for Keefe Bruyette & Woods, wrote that investors were looking to Bank of America's loan growth as a leading indicator for the broader economic cycle. Looking ahead, he wrote that residential mortgage loan sales will likely weigh on the bank's fourth quarter, "which is fast becoming a do-or-die quarter for bank lending, in our view."

"All eyes are on fourth-quarter loan growth with the hope that [Bank of America] is able to resume growing loans more meaningfully from here," Kleinhanzl wrote.

Access to capital markets has reduced borrowers' need for loans while also providing an avenue to raise funds to pay down their existing debt. Gerard Cassidy, an analyst for RBC Capital Markets, said in an interview before earnings season that banks have been originating business loans at a relatively normal pace but the elevated paydown activity has complicated the overall loan growth figures.

"I think there's mixed or counter trends going on. The pipelines are there, and they're picking up some business, but the paydowns remain elevated. So we have to remember that loan growth is your new originations less your paydowns or payoffs," Cassidy said.

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JPMorgan Chase & Co. also reported soft loan growth, particularly in the commercial banking segment. CFO Marianne Lake attributed the large-bank loan growth slowdown, in part, to the regulatory regime. Large banks have to hold more equity per loan than small banks, making it more difficult to produce a solid return-on-equity — especially when the bank targets prime borrowers.

"We do honestly think about economic capital. At some level, we have to generate a positive return for shareholders and shareholder value," Lake said on the bank's earnings call. "On these very high-credit-quality loans that we're producing, it's expensive."

Loan growth softness in the third quarter extended beyond the money-center banks to include some regional banks, as well. M&T Bank Corp. on Oct. 17 reported a year-over-year decline in its total loans, and management said the bank's commercial loan growth was negatively affected by private equity companies reducing the need for loan demand.

"We see private equity coming in and buying out some of our customers and injecting equity and/or coming in and putting debt on top of our ours with their loan funds," said CFO Darren King. "That's a phenomenon that is likely to continue for a little while longer."

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