All the ingredients are there for bankers to take a leap on lending.
Politicians are still clamoring for more loans to create jobs, shareholders are demanding growth and some bankers are noting improved credit-quality trends.
But banking executives sent a clear message Wednesday at a financial services conference hosted by Citigroup Inc. in New York: don't expect to see loan growth any time soon. The lenders said their customers are skittish — and so are they.
"The lesson — don't start reaching for growth," said Brian Moynihan, the president and CEO at Bank of America Corp. "Our job as management is not to do that. It might hurt earnings for a while, but the mistakes we made on the consumer side in particular came from acting that way."
Some of the fourth quarter's most aggressive lenders also sounded a cautious tone about their ability to repeat the feat this quarter, warning that consumers continue to deleverage and commercial clients remain cautious.
BB&T Corp., which was among a handful of big banking companies to increase lending in the fourth quarter, emphasized borrowers' reluctance. "To be honest, our clients are a bit unnerved" about health-care and other reforms being debated in Washington, said Kelly King, the $165.8 billion-asset company's chairman and CEO. Nonetheless, he said the Winston-Salem, N.C., company is hiring lenders to solicit large corporate clients.
Mark Furlong, the CEO of the $57 billion-asset Marshall & Ilsley Corp., said the Milwaukee company expects loan growth "maybe later in the year."
Richard Davis, the chairman and CEO of U.S. Bancorp, was more upbeat about lending prospects — but even he said the $281 billion-asset company hopes only to hold loan levels steady this quarter and that the portfolio could shrink. (U.S. Bancorp increased its loan book by 5% in the fourth quarter compared with the third quarter.)
Davis said the Minneapolis company's strength and continued profitability will let it make loans as others are held back by capital constraints. "We will not inhibit the close calls for companies otherwise on the edge" that the company has carefully evaluated, he said. "We're going to do that deal, and we'll be punished for it. Either regulators will tell us to mark it down as a classified loan, or we'll be charged more capital for it. We can handle both of those."
O.B. Grayson Hall, who is set to be promoted to CEO at Regions Financial Corp. in three weeks, explained in more detail to the audience why he expects "a slight decline" in the loan portfolio over the next few quarters. He said large declines in investor-owned commercial real estate will likely offset expected traction in small-business lending and use of commercial credit lines.
CRE also remains the chief hurdle for improving credit quality, though Hall and other executives gave strong indications that credit-related costs may be peaking.
"We are also seeing stabilization of chargeoff levels and a slowing in nonperforming-asset formation," he added.
James Wells 3rd, the chairman and CEO of SunTrust Banks Inc., concurred. He said chargeoff levels this quarter should be "similar or a smaller number" from the fourth quarter. "While it's hard to predict the timing … it is relatively easy to predict a recovery," he added. Most of the company's credit problems remain consumer-related, he said.
"Clearly the message — you're probably bored to death hearing it — there is good stabilization in credit quality," Marshall & Ilsley's Furlong said. "Certainly for us, hopefully for the industry as well." (M&I first reported a peak in NPAs in mid-2009.)
Zions Bancorp., in a presentation by CFO Doyle Arnold, also highlighted progress on credit issues. Previously the company thought net chargeoffs had peaked in the fourth quarter at 3%; it now believes that they are flat or dropping in a number of categories.
Nonaccrual loan inflows are expected to fall early this year, and, "If we closed the book today, [other than temporarily impaired assets] would be down noticeably," Arnold said.
The stabilization of credit has allowed Zions to improve its capital ratios without raising large chunks of new equity, he said.
BB&T, which has roughly a third of its loan book in CRE, was less optimistic. King said nonperforming assets will likely "increase modestly over the next two or three quarters," while reserve building will continue "at a slower pace." King predicted that BB&T would remain profitable this year.
Moynihan said he sees "lumpiness" in terms of credit quality, with "continued moderation" through 2010. "We remain wary of commercial real estate," he said. "We feel better about credit … but historically low credit costs remain several quarters away."
Some executives also gave indications on their plans for capital. Davis said U.S. Bancorp is prepared to raise its dividend as soon as it gets clearance from regulators. "We're sitting in the blocks," he said. "The company under all stress-test scenarios has the ability to increase its dividend and be safe in doing so."
Wells told attendees that SunTrust had invested roughly $5 billion in Treasury securities in preparation for exiting the Troubled Asset Relief Program, though he cautioned that such a move wasn't imminent. "We're not feeling any particular new pressure" to repay Tarp funds, he said.