Lower loan balances sticking around for a while, bankers say

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Banks of all sizes are navigating a period of weaker loan demand and tighter underwriting standards, signaling that margins will narrow and earnings could dip over the next few quarters.

As they contend with low interest rates, a flood of deposits and flat or declining loan volume, lenders are struggling to generate the interest income needed to bolster bottom lines. Most are resisting the temptation to ease loan terms to compete for the deals that are in the market.

Businesses, concerned about the still-raging coronavirus pandemic, are leery of borrowing to invest in expansion plans, and many consumers, who are either underemployed or worried about job security, are looking to reduce their debt loads.

Those factors will likely curb loan appetite for some time, industry observers said.

“We expect conditions to remain tight with limited demand for new loans until visibility into the resolution of the pandemic improves,” Raymond James analysts said in a Monday report.

The Federal Reserve’s latest loan data shows that U.S. banks’ portfolios have shrunk by $400 billion, or roughly 13%, since May, when participation in the Paycheck Protection Program was at its peak, including a nearly 1% decline in October.

With the exception of mortgages — where low rates have fueled refinancing activity — the drop in demand spans all consumer and business loan categories.

BankUnited in Miami Lakes, Fla., said its overall loan book shrank during the third quarter, with commercial and industrial loans decreasing by 3.3% from a quarter earlier, to $7.3 billion, as use of credit lines declined and prepayments rose. Commercial real estate loans fell by 1.4%, to $7 billion.

The $35 billion-asset company has been reinvesting its abundance of deposits in short-term securities, which has pinched its net interest margin. The margin contracted by 7 basis points in the third quarter to 2.32%.

“As we look forward, we currently expect these trends to continue,” Chief Operating Officer Thomas Cornish said during BankUnited’s recent earnings call. “We think total loans are likely to decline” more in the fourth quarter.

Other banks painted a similar picture.

Simmons First National had a loan pipeline of only $70 million at Sept. 30, CEO George Makris said during the Pine Bluff, Ark., company’s quarterly call, “signaling that loan demand remains very weak in almost every aspect of our commercial economy.”

Total loans at the $21 billion-asset Simmons First fell 4% from a quarter earlier to $14 billion. Its margin narrowed by 21 basis points to 3.21%.

Big banks with diverse lines of business are not immune.

KeyCorp said its third-quarter average loan balances fell by 3% from the prior quarter, reflecting softer demand and strict standards. The Cleveland company expects total loans to decline again in the fourth quarter.

KeyCorp’s margin narrowed by 14% from a quarter earlier to 2.62%.

“We have remained disciplined with our credit underwriting and have walked away from business that does not meet our moderate risk profile,” Chief Financial Officer Don Kimble said during the $170 billion-asset company’s latest earnings call.

The Fed’s latest senior loan officer, which covered third-quarter activity, supported the notion that bankers are being more cautious with underwriting. Lenders further tightened standards for business, CRE and consumer loans, continuing a trend that began with the onset of the pandemic.

The survey “validates what one would expect in such a choppy environment,” said Scott Siefers, an analyst at Piper Sandler.

Bankers say that, beyond the current quarter, it is difficult to make forecasts. The direction of the economy, loan demand and credit quality all rely heavily on how the pandemic plays out.

Pfizer and BioNTech said this week that their coronavirus vaccine had proved 90% effective in short-term testing. But it could take six months or longer to inoculate the American public and end the pandemic, according to the National Institutes of Health.

Even after vaccinations and widespread protection from the virus, the economy “could take much longer to heal,” said Cresset Chief Investment Officer Jack Ablin. “Pandemic precautions have left our nation with 10 million fewer jobs than it had at the beginning of the year.”

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Commercial lending Credit quality Net interest margin Coronavirus
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