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Increased optimism post-election, but loan demand not yet building

Any opinions expressed in this piece are those of the author and do not necessarily represent the views of S&P Global Market Intelligence. Follow on Twitter @NWStovall.

Bank investors hoping to see improving loan growth in the wake of the U.S. election might have to wait a little longer.

Since the U.S. presidential election, bank stocks have rallied on the prospect of reduced regulation, higher interest rates and stronger economic growth coming from fiscal stimulus and a more business-friendly environment. While bankers said during their respective fourth-quarter earnings calls that they have seen increased signs of optimism of the horizon, they stopped short of saying the improving sentiment has translated into loan growth.

"We're hopeful, if the economy starts to take off, that we'll see good loan demand, but we're just not seeing in the pipelines yet," Donald McCree, head of the commercial banking team at Citizens Financial Group Inc., said on his company's fourth-quarter call. The bulk of Citzens' operations are focused in the Northeast.

Bankers with expansive footprints elsewhere in the U.S. offered a similar viewpoint. Andy Cecere, president and COO of U.S. Bancorp, whose footprint spans from the West Coast across the Midwest, said the company's business customers are more optimistic but it has not seen a significant change in credit line utilization.

"So while the talk is there the actual action has not yet shown itself," Cecere, who will take over as U.S. Bancorp's CEO in April, said on the company's fourth-quarter call. "But again, the key point I would make is we are not seeing huge changes. In fact, it is relatively flat in terms of the overall utilization rate."

Regions Financial Corp. Chairman, President and CEO O.B. Grayson Hall Jr. said business owners have expressed greater confidence but the enthusiasm has not turned into actual lending activity yet. John Turner, head of corporate banking at Regions, added that line utilization actually declined 90 basis points in the fourth quarter.

"Line utilization is still not showing signs of that enthusiasm turning into activity, nor are we seeing applications of credits to do that," Hall said on his company's fourth-quarter call.

Among the top 50 banks by assets — the vast majority of which had reported fourth-quarter results — loan growth appeared to slow modestly in the fourth quarter. Through the fourth quarter, those institutions had grown average loans by 7.6% from year-ago levels. In the period, the banks grew loans by 1.8% from the linked quarter, or 7.2% annualized, suggesting that lending growth declined modestly in the last quarter of 2016.

Some banks that saw declines in the fourth quarter were hopeful that trends will reverse in the first quarter. Lars Anderson, COO of Fifth Third Bancorp, said the company has seen a rebound in utilization rates in corporate banking after the metric declined 200 basis points in the fourth quarter of 2016. Since then, Anderson said the number has risen 100 basis points, possibly reflecting an improvement in optimism from clients across its footprint.

"So I think it is too early to say it is a trend. But clearly that was a portion of that end-of-period, but I think we are really propositioned on a go-forward basis," Anderson said on the call.

Other bank executives were hopeful that the seeds of future growth were sown in the fourth quarter and highlighted improvements in specific lending segments. For instance, PNC Financial Services Group Inc. Chairman and CEO William Demchak said the fourth quarter was the first period in multiple quarters where the company reported growth in "plain-vanilla middle-market loans."

Meanwhile, bankers operating in some pockets of the U.S. like Texas seemed even more optimistic that loan demand could pick up soon. After receiving clarity on the political environment, Cullen/Frost Bankers Inc. Chairman and CEO Phillip Green said many "mid and small" customers are now moving forward with plans they had delayed.

Jamie Dimon, chairman and CEO of JPMorgan Chase & Co., was perhaps most vocal and specific in noting that in looking at "a broad range of things," including capital expenditures, business and consumer confidence, household formation, wage income, unemployment, and auto and retail sales, the economy is "getting stronger, not weaker."

It does seem clear that optimism is building in the business community and many market observers believe planned policy actions from the new administration could help stoke economic growth. Those hopes have yet to materialize but could spell good things for bank loan growth in the coming quarters.