Banks’ Loan Slump Signals Strength of Post-Lockdown U.S. Economy
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Banks’ Loan Slump Signals Strength of Post-Lockdown U.S. Economy

U.S. banking giants JPMorgan Chase & Co. and Wells Fargo & Co. are pointing to fresh trouble in their loan business, but it’s not the wave of defaults feared a year ago.

Bankers say borrowers are paying down balances and aren’t demanding more financing in a sign that American consumers and corporations are ready to propel an economic rebound.

Total loans at Wells Fargo slumped 15% in the year through March, while at larger rival JPMorgan they dropped 4%, according to earnings reports Wednesday. Both business and household loans declined -- normally a dark sign for banks’ future earnings that caused their stock prices to dip in early trading.

But, according to the bank leaders, it suggests something positive for the U.S. economy, underscoring that millions of people and businesses, helped by government rescues and robust debt markets, have managed their finances through lockdowns and are poised to unleash a wave of spending.

“The consumer has so much money they’re paying down their credit card loan -- which is good,” JPMorgan Chief Executive Officer Jamie Dimon said Wednesday. “So the consumers have $2 trillion more cash in their checking accounts than they had before Covid. That’s also true on the business side, where businesses took advantage of huge financing in the marketplace to raise a lot of cash.”

The figures extend a pandemic-era trend: Banks haven’t been plowing a swell of deposits back into their traditional bread-and-butter business of making loans.

At JPMorgan, the nation’s largest bank, loans now equate to 44% of its deposits, down from 57% this time last year and 64% two years ago. Federal Reserve data show it’s happening broadly. The 25 largest U.S. banks, which collectively hold more than $10 trillion in deposits, watched loans and leases drop 8% from last year. The gap between their capacity to lend and their actual lending is now the widest in 36 years of weekly Fed data.

To bank executives, the culprits behind the slump are easy to identify. The U.S. government keeps fattening household finances with stimulus checks and offering small businesses forgivable loans. The Fed has bought up mortgage bonds and Treasuries at such a pace that it’s driven down the cost of borrowing across the U.S. economy to near record lows, enabling corporations and other organizations to cheaply tap debt markets.

“When they raise cash in the public markets, they pay down loans to banks,” Dimon said. “But this is not bad news about loan demand. This is actually good news.”

The silver lining wasn’t enough to lift JPMorgan’s stock. It fell 1.8% as of 3 p.m. New York time. Wells Fargo slid before gaining on signs of progress in the scandal-ridden firm’s overhaul. Bank of America Corp. and Citigroup Inc. are set to report quarterly results on Thursday.

Less lending and low interest rates take a toll on banks’ bottom lines. At JPMorgan, net interest income fell to 40% of total revenue, its smallest quarterly share in at least a decade, data compiled by Bloomberg show. Interest income at Wells Fargo fell to its lowest portion of companywide revenue since 2012.

The economy will be significantly more active in this year’s second half, and households may start carrying bigger tabs on their credit cards then or a bit later, JPMorgan Chief Financial Officer Jennifer Piepszak said.

“With vaccine distribution accelerating, I’m hopeful that we will be shifting to a more normal way of life soon,” Wells Fargo CEO Charlie Scharf told analysts. “If the economy continues to pick up, we would expect to see increased loan demand from our commercial customers in the second half of the year.”

Scharf added that many people are being left behind by the recovery, and that they may need more help.

Lending Standards

It’s hard to know just how conservative banks have become when it comes to lending money. One sign of their appetite for risk can be found in their loan delinquency rates. The riskier the loan, the higher the chance that borrowers may fall behind.

At JPMorgan, the share of mortgage, credit card and auto loans at least 30 days late has fallen by around a half percentage point from last year. Loss rates on credit cards this year so far are below the bank’s pre-pandemic expectations, Piepszak told analysts.

Still, she told journalists, JPMorgan isn’t willing to loosen its lending standards to make more loans.

©2021 Bloomberg L.P.

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