Bankers brace for slower loan growth as 2023 kicks off

As the specter of recession intensifies amid rising interest rates, bankers and analysts widely expect loan growth to slow in the year ahead. Fourth-quarter earnings reports due this month are expected to show early signs of the deceleration, given increases in borrowing costs and moderating economic activity late in 2022.

Christopher Maher, chairman and CEO of OceanFirst Financial in Red Bank, New Jersey, said customers of the $12.7 billion-asset bank remain generally optimistic. But loan demand is easing some as both consumers and commercial clients grow wary of higher interest rates and forecasts for slower economic growth — and a potential recession — this year.

The Federal Reserve raised rates sharply in recent months to combat inflation. Historically, when the Fed moves with haste, borrowing tapers and spending slows sharply enough to tip the economy into a downturn.

As this develops, banks also grow increasingly conservative and pull back on lending, Maher said in an interview. 

"Now is the time to be very selective," he said. "You'll see more banks manage earnings, rather than pursue more growth."

Maher said he still anticipates growth in OceanFirst's loan portfolio in 2023, but the pace is likely to slow as the bank avoids new risks presented by ebbing economic activity. OceanFirst's third-quarter loans rose 19% from a year earlier.

Nitin Mhatre, president and CEO of Berkshire Hills Bancorp in Boston, said the $11.3 billion-asset bank also sees opportunity for more growth this year — though he, too, is braced for lighter loan demand. Berkshire's third-quarter loans grew 16% from a year earlier.

"People are going to hunker down some," Mhatre said in an interview.

Frank Sorrentino, chairman and CEO of ConnectOne Bancorp, a $9.5 billion-asset institution in Englewood Cliffs, New Jersey, said the Fed's efforts to raise rates are slowing the economy. This, he said, will separate stronger companies from weaker competitors. Lenders, by extension, will have to shy away from commercial clients that are more vulnerable to the impacts of a recession.

"It's important to know that we can expect a new environment compared to what we've been experiencing over the past couple of years," Sorrentino said in an email. "It will be those that know how to navigate through changing market dynamics that will be able to weather the current economic environment. … Businesses need to assess necessary changes, focus on efficient growth, remain nimble and opportunistic. 2023 will be survival of the financially fittest."

Analysts at D.A. Davidson said in a report that, among the banks they cover, they project loan growth will ease from an estimated 13% in 2022 to 7% this year. They cited higher rates and macroeconomic "cautiousness."

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Raymond James Chief Economist Eugenio Alemán said rate hikes are likely to continue well into 2023. He noted that inflation averaged about 8% in 2022 — propelled by pandemic-era supply chain problems — and held at four times the Fed's preferred rate of 2%.

"The Fed will continue to tighten monetary policy because the current policy is still not tight enough to bring inflation down to the 2% target," Alemán said in a report. "This will necessitate higher interest rates for a longer period of time."

The Fed has boosted rates seven times and by a total of 425 basis points since March 2022, when it "established its hawkish approach to curtailing inflation," Alemán said. "It is the most aggressive start to a tightening cycle in the last 40 years. The federal funds rate target is 4.25%-4.50%, which is the highest range since 2007."

Against that backdrop, loan demand is bound to slip. "We still feel good" moving into 2023, Maher said. "But, clearly, market conditions are changing."