Top industry executives are stepping up their warnings about two key components of bank profitability, saying that loan growth and net interest income will both remain under pressure throughout the year.
Senior executives at JPMorgan Chase, Bank of America, Truist Financial, PNC Financial Services Group, U.S. Bancorp and Citizens Financial Group all made downbeat comments last week about the lending outlook. Their remarks, which were made at an industry conference held midway through the second quarter, came against the specter of a potential recession.
Banks typically record their strongest loan growth during periods of robust economic growth. At the moment, bank customers are reluctant to take on more debt than they can handle, industry executives said.
"There is not a huge amount of demand in the first place in any segment," Daniel Pinto, JPMorgan's chief operating officer, said Friday at AllianceBernstein Strategic Decisions conference.
At JPMorgan, rising interest rates have reduced both mortgage refinancings and home purchase loans to a shadow of their previous levels. And many of the bank's business customers still have adequate liquidity buffers on hand.
But it's not just weaker demand for consumer and commercial loans that is driving the softer outlook. Banks have also been taking a more cautious approach to lending since the onset of
Lower loan growth can contribute to reduced net interest income, which is the difference between the amount of money a bank generates from interest-bearing products and the amount it pays to depositors to use their funds.
Truist CEO William Rogers said Wednesday that loan growth is "sort of flattish," which he attributed to both weaker borrower demand and a pullback in loan supply.
"Both things are happening," Rogers said. "Clearly, things feel a little bit differently today than they even did 90 days ago."
U.S. Bancorp CEO Andy Cecere offered a similar assessment on Friday. "Demand is down for sure, and I think we and all banks are also being very prudent around capital utilization," Cecere said.
The same trends are rippling across the entire U.S. banking industry, according to economists at the Institute for International Finance. After "torrid" growth last year, bank lending is declining rapidly, they wrote in a June 1st research note. The sharp decline is being driven largely by drops in both commercial and industrial credit and consumer lending.
"What the U.S. is seeing in 2023 is a 'sudden stop' in loan growth," the economists wrote.
At Pittsburgh-based PNC, loan growth has "definitely slowed," CEO Bill Demchak said Thursday. So far in the second quarter, loan growth at the $562 billion-asset bank has been tracking below the weekly industry average reported by the Federal Reserve, he said.
Bank of America CEO Brian Moynihan said the banking industry faces slower loan growth that will follow "the economic path" of a forecasted recession.
Moynihan cautioned that BofA's second-quarter loan growth is "flattish" and "less than we expected," driven by a drop-off in mortgage originations and tighter spending by commercial clients.
The sluggish loan growth, combined with shifting deposit mixes, has put the $3.2 trillion-asset bank in a "dogfight" to maintain its net interest income, Moynihan said. During the second quarter, that metric is expected to decline by around 2% at BofA after falling by a similar percentage during the first quarter, he said.
"We're doing everything we can to maximize and optimize," Moynihan said.
At Providence, Rhode Island-based Citizens, loan growth is "slightly shrinking," in part because the $222 billion-asset bank has been reducing "non-strategic" corporate and consumer auto lending, said CEO Bruce Van Saun.
But he said that Citizens is still positioning itself to take advantage of the "big prize" it secured last year by
"We've tightened at the margin like everybody else," Van Saun said, adding that loan portfolio reductions have prepared Citizens to manage liquidity concerns and gain "firepower to keep playing where we have valued relationships or interesting opportunities."
There were a couple of silver linings to last week's doom and gloom. First, the banks that presented at the AllianceBernstein conference generally did not make substantial cuts to their previous outlooks for loan growth and net interest income.
And second, given the caution that banks have been applying, spreads on the loans they do make are widening, according to some of the bankers.
"We're going to be more demanding about where we position ourselves and how we get paid," said Rogers, Truist's CEO.
BofA's Moynihan said that loan pricing is heading in "a good direction," with spreads widening on middle-market and small-business loans in particular.
The headwinds currently facing the banking industry include rising interest rates, slower economic growth and geopolitical uncertainty, Federal Deposit Insurance Corp. Chair Martin Gruenberg
"These risks have the potential to weaken credit quality and profitability and could result in further tightening of underwriting, slower growth and higher provision expenses," Gruenberg said.
