Judging from regulators’ recent actions and stock market movements, you might think banks big and small have made a turn onto Easy Street.
All the largest U.S. banks, including Atlanta-based SunTrust Banks, recently passed this year’s Federal Reserve “stress tests” aimed at ensuring they could survive a severe recession. That unlocked their plans to boost dividends and stock buy-backs, pleasing investors.
Most banks’ shares had already soared after the presidential election, on hopes that Donald Trump will make good on his agenda to prune regulations, cut taxes and rebuild America’s infrastructure.
But a pothole may be forming in the sector’s path.
Across the nation, bank lending has slowed for most types of loans since the presidential election. Business lending declined in the first quarter and is still crawling at close to its slowest pace since 2011, according to Federal Reserve data.
Overall loan growth is a bit better, but across the board, lending has slowed for debt ranging from auto loans to credit cards to financing for factories, office buildings and small businesses, according to the Fed.
That has made for stiff competition for bankers hunting for loan customers, and because interest rates are still low, banks’ profit margins on their total loan portfolios remain tight.
The lending slowdown has big implications for the economy, said Jeff Humphreys, director of the Selig Center for Growth at the University of Georgia’s business school.
“Credit growth is what drives the economy forward,” said Humphreys. Slower loan growth means the economy will likely remain stuck in low gear, and “it’s going to be more vulnerable to a shock” that could send it into a ditch, he said. He puts the recession odds this year at 35 percent, a “lot higher” than in recent years.
Meanwhile, many banks’ shares have been stalled for months at the levels they hit in the weeks after Trump’s election.
Joe Brannen, president of the Georgia Bankers Association, said many banks and their business customers are still waiting for the jump-start they hoped would follow the election.
“A lot depends on what happens in Washington,” he said. “The bump that everyone was looking for has been put on hold.”
Better than before
To be sure, banks are still pumping out profits and making plenty of loans, especially to homebuyers and people using their credit cards.
Total loans and leases by banks, which includes most lending categories such as business, real estate, farm and personal loans, increased by 3.9 percent in the second quarter, according to data from the Federal Reserve.
But that was after falling to a tepid 1 percent growth rate in the first three months of the year. So far this year, bankers are lending at a much slower pace than in 2014 and 2016, when overall loan volumes were growing at between 6 percent and nearly 10 percent a year, according to the Fed.
Some Georgia banks have been outdoing their national counterparts.
Last week, Columbus-based Synovus Corp., the second largest bank headquartered in the state, with $31 billion in assets, said its total loans grew by $314 million in the second quarter, up 5.2 percent compared to the first quarter. Synovus banked a $73 million profit during the quarter, 27 percent higher than a year ago.
“We’re optimistic,” said Kevin Blair, chief financial officer at Synovus. He said the bank has done well with new consumer lending through partnerships with online lenders such as GreenSky, an Atlanta-based home improvement and healthcare lender.
Synovus’ consumer loans grew at a 16 percent annual pace during the recent quarter, accounting for $2 out of $3 of Synovus’ new loans.
The bank also has avoided some problems other banks are facing lately, said Blair. “We don’t have any subprime business,” he said, and Synovus does few auto or credit card loans, where late payments by customers have been rising.
“We’re not having to pull back,” he said.
Still, Synovus saw weakness in some areas, particularly in traditional business loans used to fund working capital and other needs. During the second quarter, the bank’s business lending only grew by $10 million, and commercial real estate lending fell by $45 million.
A big hit came from a $100 million drop in business credit lines as customers paid down debt and saved cash, said Blair. “They’re keeping a lot of dry powder on their balance sheets, he said.
Blair said the tougher conditions have pushed Synovus to become more creative and aggressive. The bank has struck up a partnership with another online lender, San Francisco-based SoFi, which re-finances student loans and other debt. Synovus also has focused on making jumbo mortgage loans to doctors and other wealthy borrowers.
“Total debt is basically stable or declining. We need to take other (banks’) business,” he said. “We can’t rely on existing clients to borrow more.”
The tougher conditions are reflected state-wide, according to data from the Federal Deposit Insurance Corp.
In the first three months of this year — the latest data available at the state level — Georgia banks’ lending grew 2.4 percent compared to a year earlier. That was less than half of 2016’s pace. Total loans grew by over 5 percent in 2016’s first quarter, and by 6 percent for the whole year.
Georgia bankers’ weakest spots in 2016 were loans to businesses, which grew by less than 2 percent, and municipal governments, which declined by almost 9 percent.
Credit card balances and other individual loans, on the other hand, soared by almost 15 percent last year, while real estate lending — most banks’ biggest business by far — grew by 4.5 percent.
Slowdown ‘not untypical’
What’s driving this mixed picture?
Humphreys said several trends are coming together to slow things down, but they affect some borrowers more than others.
At this point in the economic recovery, now eight years old, it’s “not untypical” for borrowing to slow down, he said. Also, banks are tightening lending standards on auto and credit card lending due to rising delinquencies.
The Federal Reserve also has raised its target interest rate three times since 2015, most recently in June, a “primary reason” for the recent slowdown, Humphreys added.
“The Fed has been tapping on the brakes. This is exactly what the Fed wants to see,” he said. If this “gradualist approach” wasn’t slowing down borrowing, he added, the Fed would have to get more aggressive at raising rates.
Finally, there’s Trump’s stalled agenda, he added.
“We’re not really clear what the direction is going to be for a number of very important federal policies,” he said, including the fate of Obamacare and the president’s proposals to overhaul the federal tax code.
“I think that uncertainty is weighing heavily on business decisions,” he said.
Brannen, with the Georgia Bankers Association, agreed.
After Trump’s election, many small businesses were considering taking out new loans to expand or add inventory, said Brannen. But at a recent meeting, several bankers told him that small business customers have become more cautious.
“With the delays in tax reform, some of those (businesses’) plans have been put on hold,” he said. That softness, in turn, is putting more pressure on bankers to lower interest rates and ease loan terms to land new business loans.
“There’s a tremendous amount of competition for those good loans,” said Brannen.
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