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‘Flat to slightly down’: 3Q loan demand disappoints

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Even as the coronavirus pandemic choked the economy in the spring and early summer, banks reported decent loan growth as corporations drew down lines of credit and small businesses rushed to banks to access loans offered through the federal government’s Paycheck Protection Program.

The third quarter, which ends Sept. 30, has been a different story. Demand for business loans has been decidedly muted in recent months and bank executives who spoke at an industry conference this week say they can only guess as to when it will pick back up.

JPMorgan Chase's Jennifer Piepszak and M&T Bank's Darren King said that the uncertain economic outlook makes it hard to predict when loan demand will rebound.
JPMorgan Chase's Jennifer Piepszak and M&T Bank's Darren King said that the uncertain economic outlook makes it hard to predict when loan demand will rebound.

The $659 billion PPP has essentially run its course, the Federal Reserve’s Main Street Lending Program, which is aimed primarily at midsize businesses, has attracted little interest from lenders and borrowers, and many companies simply are wary of taking on more debt when the economic outlook is so uncertain.

“I would say corporate America continues to be very cautious,” U.S. Bancorp Chief Financial Officer Terry Dolan said at a virtual conference hosted by Barclays. “We see that not only in terms of [what busineses are spending] but also in terms of loan demand, which tends to be soft right now.”

At the $70 billion-asset Zions Bancorp. in Salt Lake City, total loans increased 13% during the second quarter, thanks almost exclusively to PPP. This quarter, growth is expected to be “flat to slightly down,” President and Chief Operating Officer Scott McLean said.

It’s not just weak demand that is suppressing loan growth. Since the start of the pandemic, many companies and even consumers have been rushing to pay down existing loans, lowering overall loan balances, and that trend does not seem to be abating.

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JPMorgan Chase, the nation’s largest bank with $3.2 trillion in assets, revised its full-year net interest income guidance from $56 billion to about $55 billion primarily due to higher payments on credit cards, Chief Financial Officer Jennifer Piepszak said this week.

According to Piepszak, loan growth “will be challenged” as customers keep paying down loans at a higher rate than anticipated. She said the situation will “normalize” at some point, but she emphasized that the timing of such normalization is unknown.

“I think when CEO confidence comes back, we’ll see [mergers and acquisitions], we’ll see capital investment and that will be supportive of loan growth as well,” Piepszak said. “But again it’s hard to predict when.”

Wells Fargo too revised its guidance amid slowing loan demand and higher paydowns, with Chief Financial Officer John Shrewsberry saying that full-year net interest income could be down as much as 3.6%, to $40.5 billion, from earlier forecasts.

Low interest rates are also eating into banks’ net interest margins and it didn’t help matters when the Fed said this week that it expects to keep rates near zero through 2023 to give the economy time to fully recover from the pandemic. Declining rates spur more paydowns, which reduces both commercial and consumer loans. And the lower the loan balances, the lower the service fees.

The low rates have led to a surge in mortgage refinancings — a big fee driver for banks — but not enough to offset overall sluggishness on the commercial side or in other consumer loan categories, according to Darren King, chief financial officer at the $139.5 billion-asset M&T Bank in Buffalo, N.Y.

“I don’t think we’re looking at solid growth,” King said. “I think it’ll be flattish for a while as the customers go through and do their work and think about what their outlook is for the future.”

Weak demand for loans means that banks have few options to deploy what has been a huge influx of deposits this year. For now, they are plowing those deposits into mortgage-backed securities and other bond holdings, but in a low rate environment, “the opportunity to redeploy [deposits] in securities isn't compelling,” Shrewsberry acknowledged.

In the meantime, banks will keep looking for growth opportunities where they can. The $180 billion-asset Citizens Financial Group in Providence, R.I., for example, is eyeing expansion in niche areas such as education refinance and point-of-sale financing for consumer products, while mining for more opportunities in corporate banking.

“Historically we've had a good track record of finding niche areas or finding ways to grow the loan book in a prudent fashion [and] in areas that deliver good risk-adjusted returns,” Chairman, President and CEO Bruce Van Saun said at the Barclays conference.

Van Saun declined to provide an update on the company’s outlook for loan growth, saying only that he expects it to be “broadly stable, maybe up slightly.”

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Commercial lending Commercial lines M&T Bank Wells Fargo U.S. Bancorp JPMorgan Chase