Major U.S. banks see loan growth slow as outlook for demand and economy darkens

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Analysts and investors are closely watching loan growth, a key driver of bank revenues, after extraordinary government stimulus measures during the COVID-19 pandemic dampened business and consumer appetite for bank borrowing.

As the economy recovered from the pandemic, loan demand began to recover in the first quarter, driven by consumer spending and businesses that inflated their inventories. This trend continued into the second quarter, despite aggressive interest rate hikes by the US Federal Reserve that raised fears of recession.

JPMorgan Chase & Co and Wells Fargo & Co, two of the largest U.S. lenders, said their loan portfolios grew in the second quarter by 7% and 8.4%, respectively, from a year ago, with little signs of deterioration in credit quality.

During second-quarter earnings calls on Thursday, executives at JPMorgan – the nation’s biggest lender – said they expected lending to grow by a mid-to-high figure this year.

This growth and the Fed’s rate hikes have been good news for banks, increasing net interest income, the difference between interest earned on loans and paid on deposits.

Citigroup, for example, said the gross loan yield rose for five consecutive quarters to 5.81% in the second quarter.

“2Q22 results so far reinforce our positive view,” Wells Fargo analysts wrote, citing strong credit quality, loan growth and a 10% quarter-over-quarter increase in revenue. net of interest. They said commercial loans are showing the best growth in 14 years.

Wells Fargo, JPMorgan and Citigroup all said corporate clients borrowed more in the second quarter, often to cover increased costs created by soaring inflation. JPMorgan, for example, saw strong growth in business and industrial loans, which increased by 6% thanks to increased use of revolving facilities and the opening of new accounts, while commercial real estate loans increased by 3 %.

Citigroup said lending from its institutional client group rose 3%, with executives noting that part of the increase was due to increased market volatility caused by the conflict in Ukraine.

“We are seeing an increase in lending as our clients have been less inclined to obtain funding through the debt markets given recent swings,” Citi CEO Jane Fraser told analysts.

Kenneth Leon, research director, industry and equities at CFRA Research, said he expects commercial loan growth to be flat in the second half, while consumer loans are likely to decline given the risk of recession, even if it was only shallow.

As a slump in mortgage lending due to rising rates weighed on consumer loan portfolios, credit card lending rose significantly, with JPMorgan and Wells Fargo both reporting a jump of 17 %.

Average loans for Citi’s personal banking and wealth management division, which includes cards, were up about 4% from a year ago.

Bank executives said credit quality remained very high, but warned inflation was likely to dampen consumer spending.

“I don’t think what we saw in the second quarter will continue to happen at the same pace,” Wells Fargo chief financial officer Mike Santomassimo told analysts.

Morgan Stanley said its lending grew by $7 billion year-over-year, driven primarily by wealth management clients taking out mortgages or loans secured by their investments.

But even among those well-heeled customers, borrowing is expected to decline as rates rise, making mortgages more expensive and crashing markets reduce the value of equity investments, the bank’s chief financial officer said. , Sharon Yeshaya.

“We really haven’t seen any major cracks yet when it comes to consumer health,” Leon said. “The credit quality is still very good but it will probably collapse next year.”

(Reporting by Elizabeth Dilts Marshall; editing by Michelle Price and Nick Zieminski)

By Elizabeth Dilts Marshall

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