Consumer lending outlook: Solid near term, shaky long term

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Consumer spending is bolstering the U.S. economy and, by extension, many banks’ bottom lines.

But can it last?

During fourth-quarter earnings calls, executives at banks with substantial dealings in consumer lending largely asserted to investors that everything looks good, at least through the first half of this year.

“Consumers continue to perform very well — across all of our markets,” Stephen Steinour, chairman, president and CEO of Huntington Bancshares in Columbus, Ohio, said in an interview after company posted its quarterly results.

“People are confident in their jobs, employment opportunities are high, wages are up, home prices continue to appreciate,” Steinour added. “It’s clear why consumer confidence is high.”

Continued strength in the U.S. job market — including 145,000 jobs added in December — has buoyed consumer confidence.

The Conference Board’s consumer confidence index, which measures public perception of U.S. economic health, rose to 131.6 in January from 128.2 a month earlier. Readings greater than 100 represent optimism.

Consumer spending accounts for about 70% of U.S. economic activity.

"Optimism about the labor market should continue to support confidence in the short-term and, as a result, consumers will continue driving growth and prevent the economy from slowing in early 2020,” said Lynn Franco, senior director of economic indicators at the Conference Board.

The $109 billion-asset Huntington reported strength in mortgages and auto lending in the fourth quarter, as more consumers borrowed to make large purchases.

“We expect another good year in 2020,” Steinour said.

Low interest rates following three rate cuts in the second half of 2019 made credit less expensive and buoyed consumer loan demand, including mortgage refinancings, bankers say.

Fulton Financial in Lancaster, Pa., said its 2019 mortgage originations rose by 34% from a year earlier. The sale of refinanced loans provided a lift to the $21.9 billion-asset company’s fee income, which rose 8% for the full year.

Low rates also helped the indirect auto book “grow at a solid pace,” Curtis Myers, Fulton’s president and chief operating officer, said during the company’s quarterly earnings call.

Big banks with large credit card operations reported that card usage increased during the fourth quarter.

Citigroup said balances among its North American-branded credit card customers rose 4% from a year earlier, while purchases using those cards climbed by 7%. JPMorgan Chase reported even stronger increases; its card balances rose by 8%, while spending jumped by about 10%.

“Our outlook heading into 2020 is constructive, underpinned by the strength of the U.S. consumer,” Jennifer Piepszak, JPMorgan Chase’s chief financial officer, said during the New York company’s quarterly call with analysts.

That strength is offsetting softer commercial loan demand and the adverse impacts of low rates for banks with sizable consumer platforms, industry observers said.

“The consumer looks very healthy, but low rates and lighter commercial loan demand make it a difficult environment overall,” said Stephen Scouten, an analyst at Piper Sandler.

About three-fourths of the banks covered by Piper Sandler matched or surpassed earnings estimates, thanks largely to consumer activity and higher fee income. Still, loan growth fell short of Piper Sandler’s expectations, and the net interest margin, on average, contracted by 7 basis points.

Credit quality, meanwhile, is something to watch in the course of 2020, industry experts said. It is ill-advised for commercially oriented banks to dive into consumer products because it might put them at risk if the economy sputters.

“We aren’t seeing any big problems for consumers at this point, but most community banks are focused on commercial lending, and it’s probably wise for that to remain their focus,” said Andrew Gibbs, an analyst at Mercer Capital. “Stick with what you are best at.”

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