Bankers are hopeful that a limited trade deal between the U.S. and China could lead to broader progress and create lending opportunities in 2020.
The ongoing trade war pushed investment capital to the sidelines this year, dampening loan demand. Companies affected by the dispute could rev up investment next year if Washington and Beijing can fully resolve trade issues.
Commercial lending could use a spark. C&I loans were up just 2.4% through the first nine months of 2019, a deceleration from the nearly 8% growth in 2018, according to data from the Federal Deposit Insurance Corp.
“The tariffs create a lot of uncertainty and make it nearly impossible [for companies] to make long-term investment decisions,” said Tory Nixon, chief banking officer at Umpqua Holdings in Portland, Ore., which works with a range of middle-market clients with ties to Asia.
An end to the trade war “could spur confidence and lead to significant new capital deployment,” Nixon added.
“There’s some hesitancy” to make investments, said Keith Cargill, president and CEO of Texas Capital Bancshares in Dallas, adding that there could be “a surge” in customer activity if tariffs were lifted.
The same principles for the U.S.-China trade war apply to other squabbles, including current wrangling with Canada and Mexico.
The challenge for banks will involve tapping into a post-tariff surge before an economic slowdown sets in. While few expect a recession in the immediate future, industry experts note that window of opportunity could narrow quickly.
“Recession is not imminent, but things have to slow down at some point,” said Larry White, an economist and professor at New York University’s Stern School of Business. “The question is, when and how quickly does it take hold? How much more time do we have and does the next downturn get in the way of the next catalysts for growth?”
Despite a strong job market, banks remain under pressure from a slowdown in loan demand and lower yields as a result of stepped-up competition and several interest rate cuts. While the Fed is taking a pause from additional cuts, bankers should get used to low rates.
“With low inflation, uncertain trade policies, low levels of business investment, and sluggish GDP in the rest of the world, it is highly unlikely the Fed will hike [rates] in the intermediate future,” Fred Cannon, an analyst at Keefe, Bruyette & Woods, wrote in a recent note to clients.
A pullback in business investment started to take root in the second half of 2018, as the U.S. and China started exchanging threats. Spending declined notably after new tariffs were imposed by both sides.
Fixed investment in equipment, including industrial and transportation, turned negative in the first quarter and remained low, relative to the two previous years, through the first nine months of the year, according to the U.S. Bureau of Economic Analysis.
A November survey by the Atlanta Fed found that a fifth of manufacturers had delayed or slashed spending in the first half of 2019 because of tariff concerns. Tariffs also hit the agriculture industry particularly hard; China was the biggest buyer of U.S. crop exports.
Absent federal subsidies, farm income would have declined meaningfully this year, the Department of Agriculture estimated last month.
Banks are reporting many of the same findings.
Umpqua, in an October survey of more than 500 companies with $10 million to $1 billion in annual revenue, found that a more than a third were negatively affected by new tariffs.
Nearly half of the companies, which collectively contribute about $6 trillion a year to the U.S. economy, were looking to diversify their supply chains away from China. But Nixon noted that the shift would be gradual and would not provide an immediate cure for affected companies.
While a solid majority of Umpqua’s respondents were cautiously optimistic about 2020, a protracted trade war could hasten an economic slowdown, dampen appetite for new credit and make it harder for borrowers to pay on the loans they already have.
A number of bankers remain optimistic that the U.S. and China will find common ground ahead of next year’s presidential election.
“It’s very hard to handicap how trade works out,” said Christopher Maher, chairman and CEO of OceanFirst Financial in Toms River, N.J.
“If trade were to resolve in a positive manner and become much more predictable, there’s a lot of capital on the sidelines that you could see driving stronger growth if it came back in,” Maher added.
