Bankers more optimistic about loan growth this year

Bankers are increasingly upbeat about loan demand through the remainder of 2024 as interest rates level off and customers adjust to higher borrowing costs. But worries about deposit competition and funding costs continue to concern them.

That's according to a pair of new surveys — one from S&P Global Market Intelligence, the other from Piper Sandler.

S&P Global surveyed bankers across the country in the first quarter and found more than three-fourths of them expected loan growth over the following four quarters. Some 63% anticipated growth up to 5%, while another 14% looked for their loan portfolios to expand 6% or more. Those two figures were both up from a fourth quarter survey that produced readings of about 53% and 10%, respectively.

Fewer than 10% of survey respondents expected loan declines over the coming year, down from 17% in the previous survey. The remaining expected loans would be flat.

Total U.S. bank loans in the first quarter decreased by 0.3% from the final three months of last year, according to S&P Global data.

OceanFirst Financial in Red Bank, New Jersey, is among those confident in growth over the course of this year. The $13.4 billion-asset bank's loans were essentially flat in the first quarter, but Chairman and CEO Christopher Maher expects lending momentum to build gradually, with growth reaching the "high single digits" by the end of the year.

He said the bank's customers weathered the high-rate environment that emerged in 2022 after inflation hit the highest level of this century — above 9%. Federal Reserve policymakers responded by jacking up interest rates. In the aftermath of that effort, loan demand softened and banks, worried that borrowers would struggle to cope with higher payments, grew more selective with new loans.

"But the economy continues to hold up well. We can see that in our credit experience," said Maher, noting loan loss levels that remain low. "Our customers are not stressed."

Making adjustments

He also said borrowers have adapted to higher rates and are now proceeding with loan applications that were on pause last year.   

Sam Khater, Freddie Mac's chief economist, said this new demand is evident in the housing market, for example. He noted that, during the spring months, national pending home sales increased.

"Potential homebuyers will likely not see relief from rising rates anytime soon," Khater said, but "many seem to have acclimated to these higher rates."

Meanwhile, the S&P survey found that 60% of executives expected their banks' deposits would grow over the next 12 months, on par with the prior quarter's polling. Bankers have begun to see deposit costs level off and most anticipate that trend to continue as 2024 wears on. The median expected rate on interest-bearing transaction accounts at the end of 2024, for instance, fell to 0.75% in the most recent survey, down from 1.25% the prior quarter.

"The rate of funding cost pressure has decreased significantly," Maher said.

The Piper Sandler survey of bank chief financial officers in early May, meanwhile, found that banks are generally confident in credit quality. The firm asked CFOs if they saw the need to sell off troubled loans to shore up their portfolios, and 74% said no. Another 18% answered yes but said the process would involve just one loan or a small number of weaker credits.

"It appears that more banks are looking to either work out their own problem loans or opportunistically sell loans on sort of a one- or two-off basis," said Piper Sandler's Mark Fitzgibbon, head of research.

Fitzgibbon's team also asked CFOs to name their biggest concern for 2024, and 54% said funding costs. That was notably more than the 23% that listed increased regulation and the 16% that selected credit quality.

Easing worries

While deposit competition remains heated and expenses relatively high amid the protracted era of high interest rates, the Piper Sandler survey found that worries on this front had eased. In the year-earlier survey, 62% flagged funding costs as their principal concern, or 12 percentage points higher than this year.  

While relatively small portions of the survey sample, the share of those worried about regulation and credit quality did increase from the previous-year survey — from 15% and 7%, respectively. Gross domestic product, though still growing, did ease in the first quarter. GDP expanded at a 1.6% annual rate in the first quarter, the Commerce Department said. That was down from 3.4% in the final quarter of last year and 4.9% in the quarter prior to that.

The pace of growth slowed in the face of interest rates that, for the current decade, peaked in mid-2023 and have held at that level since. The Federal Reserve has kept its target range at 5.25% to 5.5%, up from near zero at the start of this decade.

"We are at the point in the cycle where economic activity would be expected to slow and you would anticipate credit quality metrics might begin to deteriorate in coming periods," Fitzgibbon said. "As it relates to regulation, we continue to see elongated periods to receive approval on acquisitions and anecdotally have heard of regulators being much more heavy-handed during examinations."