Is a Slowdown in Bank Lending a Bad Sign for the Economy?


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Something is afoot in the world of banking that suggests the economy is not as strong as it looks.

Four of the United States’ largest banks on Friday reported third-quarter results that, for the most part, exceeded Wall Street’s expectations.

But a worrisome trend again showed up in their numbers: The banks were not lending at the same rate that they had in recent years. While the economy can grow without strong lending, it may struggle to maintain its strength if loan growth remains lackluster.

In the third quarter, the combined loans of JPMorgan Chase, Citigroup, Wells Fargo and PNC Financial Services increased just 2 percent from a year earlier, in line with the second-quarter rate. Last year, loans at the four banks grew 2.9 percent, and in 2016 and 2015 the rate was well above 4 percent.

Though third-quarter loan growth was subpar, the tax cuts enacted at the end of last year continued to lift bank profits, and rising interest rates are helping banks earn more on their loans. JPMorgan Chase’s earnings surged 24 percent. Wells Fargo, still under regulatory scrutiny after a series of scandals, posted a 32 percent rise in net income, helped, in part, by a decline in costs. Citigroup’s profits were up 12 percent.

Earnings at PNC were solidly higher, but its sluggish lending helped send its stock down over 5 percent on Friday. In the third quarter, its loans grew only 0.9 percent, and the banks said growth would be modest in the fourth quarter.

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It’s probably too early to get alarmed about the slowdown in lending.

One of the reasons growth has decelerated should not be a source of concern. Companies, enjoying stronger revenues and lower taxes, have less need to borrow and roll over existing debt when it comes due. William S. Demchak, chief executive of PNC, said Friday that borrowers were paying down their loans more than expected.

Another reason for the lower growth is sensible. Bank executives said they saw signs of the economy overheating and were holding back. At Wells Fargo, loans fell 1 percent in the third quarter. Loans to finance the purchase or construction of buildings used by businesses drove the decline. John Shrewsberry, Wells Fargo’s chief financial officer, said Friday that the bank had stayed cautious in lending to the sector out of a desire to maintain “credit discipline.”

Still, the weak lending growth could be a sign that the economy is losing momentum.

Take mortgages: Rising interest rates are pushing up the cost of mortgages at the same time housing prices in many parts of the country remain elevated. As a result, demand for mortgages has lessened. Wells Fargo’s mortgage applications in the third quarter were lower than in the preceding four quarters.

Some companies may be less willing to borrow because their executives are starting to get nervous that President Trump’s trade policies and other geopolitical developments could weigh on global growth. JPMorgan Chase’s chief executive, Jamie Dimon, sounded a warning about global uncertainties in a statement accompanying the bank’s third-quarter earnings report. JPMorgan’s loan growth, at 4.4 percent, was the strongest of the four banks that reported, but it was still well below the rates it posted in 2016 and 2015.

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Notably, there are signs outside of the banks’ balance sheets of a weakening in credit growth. Companies borrow in the bond markets, and many loans also end up in special financial entities called collateralized loan obligations. But corporate bond issues were down 15.6 percent this year through September, compared with the same period last year, according to data from Sifma, a financial industry trade group. Debt issued by collateralized loan and debt obligations was down by 47 percent, according to Sifma.

Then there is the message that bank stocks are sending. Even with the economy doing well, interest rates rising and the Trump administration’s promises of deregulation, shares in banks have lagged the broader market for months. It’s a sign that investors are not particularly excited about the growth prospects for the core businesses of banking, like lending and trading. The Standard & Poor’s 500-stock index is up 3.5 percent this year. Bank stocks, measured using the KBW Nasdaq Bank index, is down 5.9 percent.



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