Loan Growth Continues to Pick Up at Commercial Banks

My report on bank lending last month had the headline, “Finally, some real loan growth at the banks.” (http://seekingalpha.com/article/426601-finally-some-real-loan-growth-at-the-banks)

Well, loan growth has continued through March.  Loans and leases at commercial banks increased by over $10 billion in March, bringing the total rise in loans and leases up to $95 bullion for the first quarter. 

The interesting thing is that this increase occurred predominately in the “small” banks in the country, the roughly 6,265 banks that comprise the Federal Reserve’s definition of small.  The “large” banks are the largest 25 domestically chartered commercial banks in the country.  A total of $79 billion, or, 83 percent of the increase in loans and leases at commercial banks in the United States over the first quarter, came from these “smaller” banks. 

This is certainly good news.  Economic growth in the United States had been rising since June 2009, but the growth rate has been pretty tepid.  Two reasons for the slow growth were that many individuals and businesses in America were deleveraging and the commercial banking system was trying to get itself in order given all the bad assets that were on the balance sheets of the banks. 

The concern has been that as long as the banks were re-structuring and individuals and businesses were attempting to lessen the debt on their balance sheets, economic growth would remain shaky.  For things to feel more secure, banks would have to start lending again. 

Loans and leases at commercial banks were up 4.7 percent, year-over-year, in March.  Almost two-thirds of this growth came in the past six months, and over one-third of the growth came in the last three months.  This is encouraging.

In the smaller commercial banks, the largest increase in loans came in the residential real estate area.  Residential loan growth rose by more than $31 billion in the past quarter and about $53 billion in the past year. 

The interesting “turn-around”, however, was in commercial real estate loans.  For the year as a whole, commercial real estate loans at the “smaller” banks were down by almost $13 billion, but, for the last quarter they were up by more than $14 billion, a $27 billion reversal. 

Commercial real estate loans were still down in the largest 25 banks by over $5 billion in the quarter, but on the whole, the strength shown in this area is ‘hopeful” and worthy of continued watching.

Business loans at commercial banks (commercial and industrial loans) have been up year-over-year for several months now, but the real strength has been at the largest banks.  For example, year-over-year, commercial and industrial loans at the largest 25 banks in the country were up by almost $105 billion compared with an increase of $42 billion at the smaller banks. 

However, in the first quarter of 2012, business loans at the largest banks rose by $25 billion as compared to a $24 billion increase in the “smaller” banks. 

This, to me, is a good sign for economic growth.  Although it may not translate immediately into much faster growth, I take this strength in lending as protecting against a downside fall-off.

Consumer lending was particularly weak in the first quarter of 2012 as consumer lending fell by more than $2 billion.  This would seem to indicate that consumers were still consolidating and/or reducing their debts and were not out spending.  This, of course, can help to account for the continued weakness in economic growth. 

Overall, the information coming from the banking system is encouraging.  Commercial bank lending is increasing and it is increasing in both the business and real estate sectors of the economy.  Furthermore, bank lending is showing more strength amongst the “smaller” banks in the country.  This is good news to me not only because it might indicate that “main street” is beginning to show some life, but this could also be an indication that the health of the “smaller” banks is improving. 

One final point has to do with the cash balances carried by the commercial banks.  In March 2011, commercial bank cash holdings averaged $1,443 billion.  In March 2012, cash holdings averaged $1,594 billion, up $151 billion for the year.  Commercial banks are still carrying a lot of cash on their balance sheets.  (According to Fed statistics, excess reserves in the commercial banking system averaged $1,362 billion in March 2011, and averaged $1,510 in March 2012.)

However, this cash figure for March 2012 is down from the $1,838 figure of September 2011.  So, commercial banks are holding less cash now than they were at certain times last year. 

One reason for this is that foreign-related institutions are holding a lot less cash than they were last year.  In September 2011, these institutions held almost $1.0 trillion in cash assets.  In early April 2012, this figure was down to about $650 billion.  A large portion of these assets were lent out to “related foreign offices” of the foreign-related institutions.  From March 2011 to a peak in February 2012, roughly $285 billion flowed from these foreign related institutions to their “related foreign offices.”  These flows were closely connected with the financial problems being faced in Europe.  With the efforts to resolve the debt crisis in Greece and with the lending down by the European Central Banks, the needs for cash from the United States lessened.  Lending to “related foreign offices” fell by almost $90 billion between early February and early April as the pressure from the crisis in Europe receded. 

We are not yet out-of-the-woods in terms of the problems in Europe and in terms of our need for stronger economic growth in the United States.  However, particularly concerning the latter, I feel better now that commercial banks seem to be producing more loan growth.   We can only hope that this loan growth will continue to modestly expand.  

Finally, Some Real Loan Growth at the Banks

It finally looks as if the commercial banking system is starting to do some serious lending.  My last review of the banking statistics focused on the continued flow of funds in the United States banking system to foreign banks and then to deposits in the foreign offices of these banks. (http://seekingalpha.com/article/344571-developments-in-the-banking-sector-still-flowing-to-foreign-institutions) 

At the time, this flow of funds dominated everything else going on in the banking system…especially the lending activity. 

There had been a little pick up in commercial and industrial (business) loans at the largest 25 domestically chartered banks in the last quarter of 2011, but the increase was not too exciting.

Over the last two months or so, business loans at commercial banks have picked up more steam and a good portion of the increase has come at the other (approximately) 6,265 “smaller” commercial banks in the banking system. 

Also, commercial real estate loans and residential loans (home mortgages) showed some strength over the past two or three months at these “smaller” commercial banks.

For the last two years or so I have been looking for some life in the lending portfolios of commercial banks.

I believed that the economy was growing but very modestly.  My concern was that there was so much debt in the economy, household as well as commercial (both in terms of business loans and commercial real estate) that the economy would continue to drag along without much oomph. 

My concern was that households and businesses still needed to do additional de-leveraging before the commercial banks would start lending again and commercial banks needed to start lending again before there would be much life in the economy in terms of economic growth.

Now, I believe, that we are really starting to see some life in bank lending.

Over the past three months, loans and leases on the books of commercial banks in the United States increased by just about $80 billion.  Of this total, $54 billion came in the past month. 

And, to me the surprise in these numbers was the fact that over 85 percent of the increase in these loans came at the (approximately) 6,265 “smaller” banks in the United States.  The totals for these smaller banks were $69 billion and $46 billion, respectively.

Loans and leases on the books of the largest 25 domestically chartered banks in the United States continued to increase over the past three months, but not at the pace experienced by the other banks. 

Not only did commercial and industrial (business) loans increase at the “smaller” banks but there was a pick up in real estate area as well, something that had been sorely missing in earlier.

Whereas commercial and industrial loans at the largest 25 domestically chartered banks rose by almost $26 billion over the last three months, these loans rose by over $20 billion at the “smaller” domestically chartered banks.  In the last month the increase was less that $8 billion at the largest banks and over $10 billion at the “smaller” ones.

The surprise was that commercial real estate loans rose by $17 billion at the “smaller” banks over the last three months while they continued to decline at the largest banks. 

Furthermore, residential real estate loans rose by more than $23 billion at the “smaller” banks in the last three months with $16 billion of this increase coming in February 2012.

To me, this loan growth is GOOD!  It is good for the banks and it is good for the economy.   Let’s just hope it continues!

As far as the foreign-related banking institutions are concerned, cash assets at these banks rose by just about $260 billion over the past twelve months which was 75 percent of the increase in the cash assets of ALL commercial banks in the United States.  This was the concern mentioned in the first paragraph of the post.

The thing about this that we have been watching so closely is that at these banks, Net Deposits to Foreign Offices rose by almost $480 billion during the same time.  The timing of these increases coincided with the sovereign debt problems occurring in Europe and this seemed to indicate that monies being put into the American banking system were being channeled to Europe to help the banks and financial system over there. 

The Federal Reserve System also moved to offset the pressure being felt by the European Central Bank (ECB) and other central banks closely connected to the eurozone by opening up its liquidity swap line with these other central banks. 

Furthermore, the ECB also began to lend on a three-year basis to European banks.   European banks took out more than $1 trillion of these loans by March 1, 2012.

All these actions have resulted in a decline in the cash assets of the foreign-related financial institutions in the United States and basically no change in the net deposits due to the foreign offices of these institutions.  Over the past three months the cash assets of this banks have declined by more than $82 billion, about $52 billion of the decrease coming in the past month. 

So, for the time being, the liquidity problems arising from the sovereign debt crisis in Europe seem to have receded.  However, we will need to keep our eyes on this situation as some pressure is released from the Greek situation and is transferred to other European nations like Portugal and Spain.

So, I am a little encouraged.  But, I don’t want to go overboard in my enthusiasm.  It is good news that commercial bank lending has increased some over the past several months, especially at the “smaller banks”.  It is good news that foreign-related financial institutions seem to have slowed their demand for funds from the United States.  It will be more good news if economic growth accelerates a little bit.     

Bank Regulation is Going from the Ridiculous to the More Ridiculous

Bankers should be concerned about profits and making good loans and being good community citizens.

But, there is a new game in town.

Don’t grow your bank beyond $10 billion in assets.  But, if you do exceed $10 billion in assets grow your bank as fast as you can!

CEO Mitchell Feiger of MB Financial, Inc., a Chicago bank, is quoted as follows: “We are watching (deposit) accounts carefully.  We work to stay under $10 billion (in assets) until we can’t do it anymore and we’ll blow past it.  When you go past it, it doesn’t make sense to go over by $100 million.” (http://professional.wsj.com/article/SB10001424052970203918304577239172897160582.html?mod=ITP_moneyandinvesting_1&mg=reno-secaucus-wsj)

“For regional banks, expanding beyond $10 billion in assets now comes with regulatory demands that are aimed at making the financial system safer but that add complexity and costs.

As such, some banks have made the unusual decision of expanding more slowly and even turning away money to stay under the regulatory benchmark.  Some banks have lowered the interest rates they pay for customer deposits in an effort to attract less cash.  And the timing of growth initiatives also is now a factor, as some banks think it makes little sense to trip the $10 billion trigger unless they are to grow much bigger.”

Is this what we want American commercial bankers to focus on.

Almost every day the banking scene seems to get sillier…if the situation weren’t so serious.

Bankers in the United States…and all over the world as a matter of fact…are spending too much time not doing banking but doing regulatory compliance and avoidance.  Bank managements are focusing on how to stay out of regulatory trouble or regulatory attention.

This attitude is not going to change.  The changes in the regulatory environment Congress has created is going to have to play out.  Too much has been started, too many institutional changes have been initiated and organizations created, and too many people have been hired for this tidal wave to stop in the near term.  

And, regulators are still fearful of bank failures as the number of problem banks remains large and bankruptcies and foreclosures stay near record levels.  We still hear about the fact that 22 percent of the homeowners with mortgages on their houses in the United States have mortgages that are greater than the market value of their home.  We also hear that the commercial real estate market is still sufficiently in trouble that many of the loans on these properties are below loan values.  There are a lot of banks that are not out of the woods yet.      

Unfortunately, the folly will continue.  I see no way out of this swamp at the present time.