Bank Earnings Climb in Growing Economy, but Lending Doesn’t Keep Pace

Tax cuts, deregulation and a buoyant economy were always expected to drive profits higher at most American banks in the latest quarter.

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Peter Eavis
Emily Flitter, New York Times

Tax cuts, deregulation and a buoyant economy were always expected to drive profits higher at most American banks in the latest quarter.

But a nagging question has been hanging over the industry: Would banks, taking their cue from rising economic optimism and a friendlier White House, significantly increase their lending to businesses and households?

Friday, earnings reports from four of the United States’ biggest banks showed scant evidence of such a revival.

JPMorgan Chase & Co., Citigroup Inc. and PNC all reported another quarter of healthy profits, most of which will end up in shareholders’ pockets. Wells Fargo & Co., operating under regulatory constraints after a series of scandals, reported a decline in profits.

Overall, lending at the four banks grew only 2.1 percent in the second quarter from a year earlier, according to an analysis by The New York Times. That represents a slowdown from the 3 percent rise in the first quarter. It is also well below the 4.6 percent increase in loans that the four banks achieved in all of 2016, the last full year of the Obama administration.

The Trump administration has contended that many of the regulations introduced after the financial crisis a decade ago to make banks stronger have held back lending and weighed on the wider economy. But annual loan growth for the banking sector as a whole was stronger in the last two years of the Obama administration, according to figures from the Federal Reserve.

A pickup in lending, which would help more people buy houses and enable businesses to expand, may yet occur.

Looser regulations and the robust economy can take time to translate into more lending. Tax cuts have increased cash flows at companies, perhaps reducing the near-term demand for loans. Higher interest rates may also be deterring borrowers. And banks may be holding back because they do not want to extend loans that have a higher chance of defaulting.

Even so, the banks have plenty of spare cash they could use right now to fuel higher lending if they wanted to. Instead, they have opted to make large payments to shareholders in the form of dividends and stock buybacks. After passing the Federal Reserve’s regulatory stress tests last month, the four banks that reported results on Friday had announced plans to distribute nearly $90 billion to shareholders.

“As we sit here right now today, I would characterize demand as being solid, as being decent — it’s not what it was two years ago,” JPMorgan Chase’s chief financial officer, Marianne Lake, said on a conference call with journalists. She said growth in construction loans had slowed in part because businesses were using cash from their tax cuts to expand instead of taking out more loans.

JPMorgan, the nation’s largest bank, had the fastest loan growth among the four banks. JPMorgan's total loans grew by 4.4 percent. In the second quarter, JPMorgan’s earnings per share soared 26 percent from a year earlier.

Wall Street analysts expected Citigroup, the country’s third largest bank, to report slightly more revenue than it actually did for the quarter. The difference was less than $100 million, but the miss still sent Citi’s shares lower on Friday. Citi’s loans grew by 4 percent from a year earlier, well below the 7 percent rise in the first quarter of this year. After adjusting for changes in exchange rates, Citi’s loans grew 5 percent in the second quarter compared with a year earlier, the bank noted in its earnings release. Loans to corporations grew by 8 percent in the second quarter.

Wells Fargo’s loans declined by 1.4 percent in the second quarter. Analysts did not expect strong growth at Wells Fargo after the Federal Reserve earlier this year required that the bank cap the growth of its balance sheet while it fixes the problems that led to a string of scandals.

But last month, Wells Fargo’s chief financial officer, John Shrewsberry, said the cap was not a significant factor. “It’s not a constraint on organic loan growth,” he said.

Wells Fargo’s loans to buyers of commercial properties, like office buildings and shopping malls, declined by $2.5 billion in the second quarter from earlier this year.

The bank’s chief executive, Timothy J. Sloan, told analysts Friday that the bank did not want to compete for such loans by relaxing its terms. “We are seeing a deterioration in underwriting standards,” he said.

The recent sluggishness in loan growth is not necessarily a bad thing. Some borrowers, especially large companies, have been able to borrow freely for years. And new regulations discouraged banks from making loans that borrowers will struggle to repay. That the economy is expanding without a huge surge in debt is probably one reason the current recovery has lasted so long.

“There’s a lot of debt out there already,” said Sheila Bair, a former head of the Federal Deposit Insurance Corporation. “It’s not necessarily bad that loan growth is slowing. What you don’t want them to do is search for borrowers and do a lot of non-creditworthy loans.”

Still, some analysts said the banks could be doing more to stimulate the economy.

Barry Ritholtz, the chairman and chief investment officer of Ritholtz Wealth Management, said banks were still reacting to the trauma of the financial crisis, when too much risky lending led them to the brink of collapse. “This is a case of where the lawyers and the compliance people have utterly overreacted and have created a situation that is not good for the industry,” Ritholtz said.

He said psychological blocks, not regulatory ones, were to blame for their reticence and pointed to the recent rise of an Arkansas-based bank, Bank of the Ozarks, to the top of the list of the country’s largest construction lenders, as an example of an institution that is lending more boldly.

Bank of the Ozarks on Wednesday reported that its loans grew 10 percent.

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