If you examine closely the earnings of the big regional banks, you’ll see that retail loans have carried the day in a messy quarter marked by one-time tax adjustments.
In the latest results published Friday, several big names — Citizens Financial Group, Regions Financial and SunTrust Banks — reported strong results in consumer lending, driven in some cases by double-digit growth in loans made through high-tech partnerships with retailers and fintech lenders.
The ongoing ramp-up is especially significant for regionals given that middle-market commercial lending has long been their bread and butter. But as the yearlong slowdown in business lending persists, with commercial borrowers still shying away from bank loans, banks have begun turning to higher-yielding consumer loans to help ease the pain.
The big question is: How long can that continue?
In the year ahead, the $152 billion-asset Citizens plans to announce some new partnerships similar to its arrangement with Apple, CEO Bruce Van Saun said during his company’s earnings call.
The Providence, R.I., company currently provides financing on iPhones at the point of sale at Apple stores. The loans are interest-free for consumers, but, through an agreement with Apple, involve a prenegotiated interest rate that is covered by the retailer, in return for using the bank’s balance sheet to hold the loans.
“The thing they would have in common is there’s either a point-of-sale on a product that is of the size to require some financing,” Van Saun said during an interview Friday afternoon in commenting on the new partnerships.
Van Saun declined to provide details about the partnerships, though he said during the Citizens' earnings call that they were in the pilot phase. The company included the projected impact of the deals in its forecast for total loans to grow by as much as 5% in 2018.
During the fourth quarter, its total loans increased 3% to $110.6 billion. Retail loans grew 5% to $58.6 billion, driven by a 61% increase in a category that includes unsecured lending through partnerships with Apple and the home security systems company Vivent.
Consumer lending also continues to be an area of focus at SunTrust. Excluding mortgage loans, retail lending rose 12% to $29.1 billion.
The Atlanta company has invested “consistently” in LightStream, its online personal lending unit, as well as in its credit card business, said Chief Financial Officer Aleem Gillani during the company’s earnings call.
Regions Financial, of Birmingham, Ala., also reported bright spots in consumer lending. Point-of-sale loans grew sharply, though the size of the retail loan book overall shrunk because of the company’s ongoing pullback in auto lending.
Loans made through Regions’ partnership with the home improvement lender GreenSky and other initiatives increased 57.5%, to $1.4 billion. Meanwhile, consumer credit card lending rose 8%.
“Consumer is a good story, and it’s a steady story,” Chairman and CEO Grayson Hall said during the company’s call Friday.
Like a number of big banks, Citizens and other big regionals have scaled back on home equity lines of credit in the years following the crisis, as clients have paid down loans taken out before the bust.
But Citizens expects its home equity portfolio to turn around and start growing within the next year, with new originations expected to soon outpace paydowns. The company has also invested heavily in data analytics software, and is now targeting the product at so-called “mass affluent” customers.
“Everything augurs well for that business to lift,” Van Saun said. He noted that the company has also reduced the time it takes to fund a home equity loan to about seven days, which he described as much shorter than the industry average.
When asked whether Citizens expects to feel pressure from Goldman Sachs, the latest entrant to the home improvement loan market, Van Saun downplayed the concern. Goldman this week began offering personal loans of up to $40,000 for home remodeling projects, similar to products offered by fintech competitors such as LendingClub and Prosper Marketplace.
“They don’t have huge brand equity as a consumer-oriented bank,” Van Saun said. He said that consumers still think of Goldman as a Wall Street giant, and as the “vampire squid guys” — a reference to a 2010 Rolling Stone article about Goldman’s role in the housing crash.
“I worry more about our traditional bank competitors,” Van Saun said.
The focus on consumer lending illustrates an ongoing trend that has been somewhat overshadowed in a quarter dominated by chatter about tax cuts and one-time charges. That is, banks continue to look for ways to counteract the deceleration in commercial lending.
The trend continued in the fourth quarter, with commercial loans rising just 2.2% as of Dec. 27 from a year earlier, compared with 7.3% during the same period in 2016, according to a Wedbush Securities analysis of weekly lending data from the Federal Reserve.
At Citizens, commercial loans increased just 1% to $52 billion.
“We came out of [the fourth quarter] and you saw that, in the industry as well as in our own businesses, a little bit of softening in some areas that drive [business] loan growth,” Donald McCree, Citizens’ head of commercial banking, said during the call.
Citizens expects commercial loan growth to accelerate in the second half of the year, McCree said. Meanwhile, other key areas of consumer lending — including student loan refinancing and mortgage lending — are expected to increase steadily.