Loan growth remains a case of one step forward, two steps back at many banks that have reported quarterly results in the past week, which means they will have to continue to lean heavily on rising rates and tax savings to generate profits the rest of the year.

As second-quarter reports from SunTrust Banks, Citizens Financial Group and Regions Financial clarified on Friday, loan growth remains spotty across banks and credit segments. Just as consumer lending seems to take a great leap forward, something like commercial real estate loan or mortgage weaknesses set some banks back.

Indeed, among 10 large banks that have reported since July 13, two had 4% loan growth year over year, and five others reported increases below 2.5%. SunTrust’s loans were flat, and total loans at Regions Financial and Wells Fargo shrank.

Total loan growth at big banks in second quarter of 2018

The best performers in coming months will be those who can leverage relationships with business customers to keep a lid on deposit costs, thus improving net interest margins, said Jared Shaw, an analyst at Wells Fargo Securities.

"It used to be that everyone was focused on the asset side and that's what made banks stand out," Shaw said. "Now it's really going to be the banks that have strong relationship-based funding. That's where you're going to see outperformance, through the margins."

But margin growth is threatened as the Federal Reserve takes heat from President Trump and others to slow down rate increases amid currency imbalances and trade fights; that debate intensified on Thursday in Washington and continued Friday. Meanwhile, banks’ interest expenses are already starting to rise, and that trend will likely continue as competition for deposits strengthens.

The reliance on strong margins has been on display this earnings season. Declines in business and construction loans at SunTrust canceled out direct consumer and commercial real estate growth. In total, loans held for investment were little changed, at $145 billion.

The good news for the Atlanta company is that the net interest margin widened 17 basis points to 3.23%. SunTrust benefited from a combination of higher short-term interest rates, which boosted average yields, and the fact that loans with higher yields had the fastest growth.

“We … benefited from positive mix shift within the loan portfolio as consumer direct continues to grow faster than the rest of the book,” Chief Financial Officer Allison Dukes said during a Friday conference call.

Citizens Financial Group had faster-than-expected margin improvement, too. The Providence, R.I., company’s margin climbed 21 basis points to 3.18%. That helped with loan growth that is not as rapid as Chairman and CEO Bruce Van Saun wants.

“You get the sense that net interest margin is making up for slightly – not much, but slightly – lower loan growth,” Van Saun said in an interview. “I would say that really goes back to the first quarter, when loan growth was a little more tepid” for the industry.

Van Saun expects Citizens to come up “a little on the light side” of its goal of increasing total loans by 4.5% to 5.5% during 2018.

Citizens and Van Saun aren’t the only ones slogging through spotty loan growth. At Regions Financial in Birmingham, Ala., commercial and industrial lending grew 3.6% to $36.9 billion, but owner-occupied commercial real estate loans dropped 7% to $6 billion. Both Webster Financial in Waterbury, Conn., and Umpqua Holdings in Portland, Ore., experienced growth in business lending, but declines in consumer loans.

C&I lending surged at many banks (11% at KeyCorp, 14% at Webster), but even that category has been hit-or-miss. At SunTrust, for example, C&I loans dropped 2% to $67 billion.

One problem is that many commercial customers remain reluctant to pull the trigger on big financing needs (or they are fulfilling the need through nonbank lenders). Line utilization rates seem stuck at persistently high rates, Shaw said.

“Banks had been expecting to see an increase in utilization rates and that hasn’t really come through at all,” Shaw said. “It hasn’t picked up yet in the way you thought it would when you had tax reform.”

Unused credit lines were at their highest level in five years at March 31, rising to 44% of total industry assets, according to BankRegData. The trend seems to have continued through the second quarter, as at least three banks—KeyCorp in Cleveland, East West Bancorp in Los Angeles and Great Southern Bancorp in Springfield, Mo.—reported quarterly increases in unused commitments for both commercial and construction loans.

(Most banks don’t break out unused loan commitment figures in earnings report, but they will disclose those numbers in call reports filed with the Federal Deposit Insurance Corp. in the coming weeks.)

Utilization trends may change in the months ahead. Business clients recently have been using their own cash on hand, or other sources of liquidity, to fund their investments, Regions CEO John Turner said in a Friday conference call. Once that liquidity is used up, commercial clients will likely begin borrowing again, he said.

“We would point to $500 million, more or less, in deposit declines that we think has been directly related to customers putting that to work” instead of taking out loans, Turner said. “At some point, we think that will translate into additional loan growth.”

It is understandable that companies had so much cash available. A significant portion of growth in prior years came from companies that were stockpiling cheap sources of funds while interest rates were stuck at historic lows, Van Saun said.

“There was a great asset for sale, which was cheap money,” he said.

The trick once commercial loan growth does a full rebound is how to fund that demand without overpaying for deposits. Large and regional banks have been slow to pass along rate hikes to deposit customers, but many expect that to change later this year. How banks manage that balance will play a role in margins.

SunTrust has boosted funding levels through an increase in certificates of deposit, Chairman and CEO William Rogers said. CDs cost a bank more but typically allow for deposits to remain inside the bank for longer periods.

“We certainly see a pickup in CDs on our balance sheet,” Rogers said during a conference call. “That’s for us a very attractive source of funding. We’ve been using that very deliberately as a tool” to manage the impact of interest rate hikes.

Using CDs to manage deposit pricing is one of many tools that banks will need this year. Banks’ loan demand is going to rebound, just at a much slower pace than most would prefer, Van Saun said. It’s likely that industrywide loan growth in the years ahead will reflect the pace of overall economic expansion, he said.

“It’s a bit of an adjustment from a little bit of a turbocharged environment when rates were lower, to something now that’s more in keeping with just economic growth,” Van Saun said.

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