Weak Lending Trends Don’t Bode Well For Upcoming Bank Earnings

From Brad Hoppmann: You’ve heard the expression, “beg, steal or borrow.” Well, I don’t know about begging or stealing. But when it comes to borrowing, things are going slow.

That’s the conclusion drawn in the Wall Street Journal today. It cited the latest lending data from the Federal Reserve by commercial banks.

During Q1, total loans and leases extended by commercial banks in the U.S. were up just 3.8% from a year earlier. (As of March 29.)

That compares with 6.4% growth in all of 2016, and 7.6% year-over-year growth as of late October.

Moreover, loans to businesses have slowed significantly. The latest data shows commercial and industrial loans up just 2.8% from a year earlier, compared with 8.9% growth in late October.

Here’s how the WSJ sums it up:

The slowdown is more surprising given the rise in business and consumer confidence since the election. And it is worrisome because the lack of business investment is considered an important reason why economic growth has remained weak.

Indeed, the rising optimism in the economy that’s been reflected in survey data is something that’s helped drive the price of equities higher since the election of President Trump.

Yet the data on lending since November has been on a different trajectory.

The chart here of U.S. commercial bank loans and leases shows a distinct downturn, just after a brief post-election spike.

Then that trend has basically gone down since, with a big decline in March.

Now, there are a lot of theories about why this is happening. And the WSJ article covers some of the potential reasons.

One theory is that companies have been going to corporate bond markets to lock in low interest rates in order to pay down more-expensive bank debt.

The article cites the 18% rise in corporate bond issuance in Q1, as reported by the Securities Industry and Financial Markets Association, as support.

Another theory is that economics in the oil industry are very different this year vs. last year. Recall that in Q1 2016, many oil companies used bank lines of credit for financing, as oil prices were falling sharply.

In Q1 2017, however, oil prices were higher, and those same companies are paying back those bank lines (i.e. not borrowing).

To me, the likelier explanation at the root of the borrowing slowdown is political uncertainty.

While we have seen consumer confidence and business sentiment trend higher since Election Day, those metrics are “soft” data.

When it comes to the actual, “hard” data, the numbers just aren’t there.

In other words, there is a disconnect between attitudes and actions … and that is being reflected in the lending data.

Here’s how the WSJ puts it:

Consumers and businesses may express greater confidence since the election, but many might still hesitate to take out big-ticket loans to fund new projects until they have greater clarity on the outlook for tax, trade and healthcare policy.

It’s this hesitation due to political uncertainty that I suspect has tamped-down lending. But just how much that hesitation will translate to the bottom line of banks in Q1 is what we need to find out next.

Fortunately, we will start to discover some answers as early as Thursday morning. That’s when some of the biggest banks — Citibank (C), JPMorgan (JPM), PNC Financial Services (PNC) and Wells Fargo (WFC) report earnings.

Citi, JPM, PNC and Wells are sitting on double-digit gains post-election.

For the current rally in markets to get a boost, and particularly the recently ailing bank stocks, we will need to see strong numbers from these stalwarts.

We’ll also need to see upbeat commentary from management about the current climate, and about the outlook for the next several quarters.

If things start to look sketchy, then look out below.

The Financial Select Sector SPDR Fund (NYSE:XLF) fell $0.27 (-1.15%) in premarket trading Wednesday. Year-to-date, XLF has gained 0.60%, versus a 5.16% rise in the benchmark S&P 500 index during the same period.

XLF currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #14 of 38 ETFs in the Financial Equities ETFs category.


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