Surprise: Banks Are Starting To Lend

Dash & Protess Dealbook October 18, 2011

Despite all the bleak economic news, a funny thing has been happening in the financial industry over the last few months: the banks have quietly turned on the lending spigot.

Loan growth is still modest. And it remains heavily weighted toward the strongest corporate and consumer borrowers. But after several quarters of having their loan balances plunge or flatten out, several of the nation's biggest banks are reporting increases.

On Monday, Citigroup officials said the bank recorded loan growth, compared with a year ago, in almost every one of its businesses during the third quarter, and in almost every corner of the globe. Wells Fargo executives said new loan commitments to small businesses were up 8 percent, while lending to bigger companies has been growing for 14 months in a row. Across the industry, analysts expect credit card loan balances will start increasing before the end of the year.

"The narrative that banks aren't lending is incorrect," Timothy J. Sloan, Wells Fargo's chief financial officer, said in an interview. "Lending is strong, and based on what we're seeing," he added, it will "continue to grow."

Still, the stocks of both banks, and the sector as a whole, dropped on Monday as the sluggish economy and revenue figures pointed to broad drags on the banks, including low returns on making loans and exposure to the European debt crisis.

But the new lending numbers suggest that while the economy remains extremely fragile, the confidence of consumers and businesses may be more resilient than many experts had believed. "It hasn't really strengthened, but it looks like the recovery is still here," Jamie Dimon, JPMorgan Chase's chairman and chief executive, said after heralding his bank's lending data last week.

There are myriad explanations behind the uptick in loan growth, including more customers taking advantage of ultra-low interest rates and borrowers in need of cash drawing on their credit lines. Others believe the downbeat headlines in recent weeks have been overblown. If the confidence clouds hanging over Europe and the United States were removed, the lending figures would be even stronger, analysts and bankers say.

Housing remains the banking industry's Achilles' heel. Mortgage and home equity loans have fallen more than 6.2 percent since their peak in late 2007 and early 2008, according to weekly data from the Federal Reserve. Most banks have ratcheted up the underwriting criteria so that fewer new borrowers qualify for a loan, especially in the housing markets along the coasts that were hit hard by the recession. As existing loans end, they are less likely to replace them with a new one.

But there has been a modest increase in lending elsewhere. Over all, corporate lending has rebounded 7.2 percent after bottoming out in October 2010. Consumer lending, with the exception of housing-related loans, turned positive during the second quarter and has been gradually increasing since then, the data show. All told, total loan balances are near where they stood in mid-2007.

"The banks want to lend," said Gerard Cassidy, a longtime banking analyst at RBC Capital Markets. After all, he said, more than 70 percent of their income is tied to that activity. And the Federal Reserve survey of loan officers shows that banks have been gradually relaxing their underwriting requirements.

Others, however, say the banks are still clinging to their purse strings. For a broader recovery, they will need to make loans more available to more consumer borrowers with blemished credit histories and a broader array of small businesses, the critics say.

"I don't think the lending window is open near enough to what you need to see to get the economy growing, businesses expanding, and to bring the unemployment rate down," said Bernard Baumohl, the chief global economist at the Economic Outlook Group, a forecasting firm.

So far, the revival in lending has not been strong enough to significantly move the revenue needle for the nation's biggest banks, either. The poor performance of their Wall Street-related businesses and the elimination of once-lucrative overdraft and credit card penalty fees have weighed on their results. Meanwhile, the rise in new loan volume has not been enough to offset the lower profit margins on new loans as a result of the Fed's decision to keep interest rates close to zero until at least 2013.

On Monday, Citigroup reported that its core revenue fell 8 percent, even as it squeezed out a $3.8 billion profit with some favorable accounting. It booked a $1.9 billion paper gain since the cost of retiring its debt had, theoretically, declined because of concerns over its financial condition. It also delivered about $1.4 billion to its bottom line, using money it had previously set aside to cover credit card and other loan losses. Together, those moves accounted for more than 60 percent of its pretax earnings.

Wells Fargo also reported a 6 percent drop in revenue, as several major divisions, like its vast mortgage operations and its investment banking businesses, reported a decline from last year.

But the bank still managed a record $4.1 billion profit, thanks in part to a sharp reduction in charge-offs and the release of $800 million in loan loss reserves.

But buried in the numbers of both big banks were signs that loan growth was modestly improving. Citigroup pointed to healthy demand in emerging markets, which have only recently started to feel the impact of the global slowdown.

In Asia, for example, corporate loans grew 22 percent, while card lending increased by about 4 percent, excluding the impact of the exchange rate. Citi's Latin American operations showed similar resilience, while even the North American business showed a slight increase in lending, with the exception of mortgages.

Much of it is not "forced lending" as borrowers tap credit lines because they are in desperate need of money to pay their bills, Citi executives said. Small-business customers are "drawing them down because they have real needs and we are extending additional commitments," said John C. Gerspach, Citigroup's chief financial officer. "Absent the continued uncertainty, you would likely have loans growing and the economy growing at a faster rate."

Executives at Wells Fargo, whose giant lending operations are largely focused on consumer and corporate borrowers in the United States, said that "customer sentiment is good" even though some of the economic data worsened during the third quarter. "It's not just energy or commercial real estate; it's really across the board," said Mr. Sloan, the chief financial officer at Wells Fargo.

Some of the growth was due to foreign lenders ceding some ground to Wells and other large American banks, rather than an overall increase in demand. The uptick in Wells Fargo's commercial lending business was aided, in part, by a $1.1 billion commercial real estate portfolio it bought from the Bank of Ireland. Even its mortgage business, which reported more than a 50 percent jump in home loan applications, owed some of the lending growth to consumers refinancing existing loans "” not people obtaining new ones.

On Thursday, Mr. Dimon was keen to highlight JPMorgan's lending numbers in an otherwise sobering quarter. Lending to small businesses with less than $50 million in revenue was up 70 percent through this year compared with the same period in 2010, while lending to middle-market customers was up 18 percent.

"These are pretty powerful numbers," Mr. Dimon said on a conference call with journalists. "We look at loan growth translating to jobs."

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Surprise: Banks Are Starting To Lend

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