Signs of loan growth appear (if you look hard) at BofA

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The much anticipated pickup in loan demand may actually be there, although it’s necessary to move stuff around and look under seat cushions to find it.

Following first-quarter results by the three other megabanks that disappointed investors with tepid loan growth, Bank of America issued numbers on Monday that suggest things are not that bad. The Charlotte, N.C., company’s performance, plus executives’ outlook for the rest of 2018, were good signs, one analyst said.

“Their optimism about future loan growth was the strongest amongst the banks that have reported, which should give investors some comfort about what the year could look like for loan growth,” said Gerard Cassidy, an analyst at RBC Capital Markets.

Total loans and leases at March 31 increased 2% from a year earlier to $932 billion; loans rose 3% when allowances are excluded. The underlying figure was even larger if one ignores legacy loans that BofA let run off its books over the past year, Chairman and CEO Brian Moynihan said during a conference call with analysts.

“We have seen loan growth of 5% year over year in the core businesses,” Moynihan said. “Remember, we’re still running off some portfolios, believe it or not, 10 years after the crisis. In our view, that’s solid loan growth.”

Later in the call, Moynihan said: “We have been growing at a decent clip. Expect that to continue.”

Bankers' comments this earnings season about loan growth are being closely watched because of lackluster commercial loan growth in the past year and the high expectations for 2018 given the Trump-era tax cuts for businesses.

Darren King, the chief financial officer at M&T Bank in Buffalo, N.Y., said Monday he has noticed a distinct change in attitude from his clients. Borrowers have talked about potentially investing in more equipment more so than they had in previous years.

“There’s definitely a little more positivity, and we’re optimistic that that will translate into some more loan demand as we go through the year," King said. However, he warned there are caveats in a period of renewed global uncertainty.

“The only thing that seems to dampen that a little bit as of late is some of the trade and tariff conversation that’s going on," King said. "There’s a little bit of uncertainty based on those actions that are ongoing, but overall, the mood is definitely more positive than we saw in the second half of last year."

BofA's Moynihan stressed that the first three months of the year would have appeared stronger if the bank had not continued to clean out unwanted assets. A large portion of the loans that BofA ran off its books were credit cards, he said.

“We ran off a lot of cards we didn't want over the years that were causing a lot of charge-offs,” Moynihan said during the call.

Still, investors reacted cautiously. BofA shares rose 0.9% to $30.06 in afternoon trading on Monday. JPMorgan Chase shares increased 0.4% to $110.79, Wells Fargo shares climbed 0.3% to $51.02, and Citigroup shares dropped 0.7% to $70.50.

That followed the negative reaction to quarterly results on Friday. JPMorgan shares fell 3% on Friday to $110.29, Wells dropped 2% to $50.89, and Citi declined 1% to $71.01.

The tax cuts were supposed to have stimulated more borrowing by companies and consumers but it hasn’t happened yet, “not that we can see,” said Brian Kleinhanzl, an analyst at Keefe, Bruyette & Woods.

“The hope was that the tax cuts would cause growth, but mostly people are just paying down their debts,” he said.

Equity investors’ lack of enthusiasm stems from a desire for more rapid loan growth, said Lisa Kwasnowski, an analyst at the bond rating agency DBRS. But for fixed-income investors, banks are being appropriately cautious, she said.

“It feels like the crisis is far back in the rear-view mirror, but for some of these banks it’s still fresh in their minds,” Kwasnowski said. “As long as we see a combination of loan growth and managing risk metrics, they’re looking good.”

BofA executives were bullish about growth in several loan categories, including commercial real estate and commercial and industrial. Consumer lending had the strongest performance, as loans in the category rose 8% to $279 billion, led by residential mortgages and credit cards.

“Consumer and business confidence continues to be strong, and we see that in accelerated consumer spending in our customer base,” Moynihan said.

The average balance of mortgage loans rose 31% to $77 billion, and the average balance of credit cards increased 5% to $91 billion.

Some of the growth in mortgages came from BofA’s expansion of digital services in mortgage lending, which helped accelerate the application process. New features include pre-filling of customer data, digital loading of support documents and utilizing electronic signatures.

BofA, however, may be taking a step back in some categories, namely commercial real estate. Some competitors have become too aggressive in the category, Chief Financial Officer Paul Donofrio said during the call.

“We’re getting to a little bit of a place where we are not comfortable,” Donofrio said. “We’ve been growing, but it’s just been a different level of growth relative to many of our competitors.”

His comments reflected concerns about competitive pricing practices raised Friday by William Demchak, the CEO of PNC Financial Services Group, which is moving more cautiously in CRE and commercial and industrial loans.

BofA's home equity lines of credit have also been sluggish, as consumers have paid down existing balances faster than they have taken out new HELOCs, Donofrio said.

Ultimately, BofA delivered a “mixed message” on loan growth and investors are starting to tire of Moynihan’s repeated forecasts of accelerated loan demand, Kleinhanzl said.

“Loan growth is decent for them,” he said. “But their optimism is the same story as the last three years, and investors are starting to get a little wary of that story.”

Laura Alix contributed to this article.

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