Lending Slump Worries Investors Even as U.S. Bank Profits Soar

(Bloomberg) -- Investors are signaling fresh concern about when the largest U.S. banks will get back to their bread-and-butter business: lending money.

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon’s statement about “challenged” lending -- a word he quickly said he regretted using -- pressured share prices, as did shrinking quarterly loans across banks. Bank of America Corp. reported a 14% decline in loan balances in the first quarter from a year earlier, while Citigroup Inc. said Thursday that loans tumbled 10%. Those dropoffs followed the 4% slump in loan balances at JPMorgan and the 9% decrease at Wells Fargo & Co., reported Wednesday.

Executives from all the companies struggled to provide precise targets of when they expect loan balances to increase or by how much, while expressing optimism about economic growth coming out of the pandemic.

At the four largest U.S. banks, the lending slump and low interest rates combined to sharply cut net interest income -- what lenders make from borrowers minus what they pay depositors -- even as their trading and investment-banking businesses sent earnings soaring. At JPMorgan, for example, NII accounted for 40% of total revenue, its smallest quarterly share in at least a decade, data compiled by Bloomberg show. At Bank of America, net interest margin -- the difference between what it costs the company to borrow and what it receives from loans and investments -- fell 0.65 percentage point to 1.68%.

Worries about whether the nation’s biggest banks can meaningfully increase lending contributed to share-price declines on Thursday, with Bank of America slumping as much as 4.6%, its biggest intraday decline in more than five months. The KBW Bank Index was down 1.5% at 1:59 p.m. in New York, led by Truist Financial Corp., which fell 4.7%, and Bank of America.

“Whether it’s fair or not, bank investors care much more about NII, NIM and loan growth than they do trading and underwriting,” said Adam Crisafulli, founder of Vital Knowledge Media LLC. “This is why the group is trading so poorly.”

Read more: Big Banks See U.S. Rebound Juicing Profits After Trading Bonanza

Bank executives repeatedly stressed this week on calls with analysts and journalists that they’re the victims of tepid demand for credit. Households are so flush with money -- having stashed $2 trillion more cash, according to Dimon -- that they not only don’t need new loans but are paying down existing balances. Companies, meanwhile, can tap cheap debt-market financing, and therefore aren’t seeking bank credit.

“This is not bad news about loan demand,” Dimon said. “This is actually good news.”

Deposits Climb

Earnings results mirror weekly data the Federal Reserve publishes on bank balance sheets. The 25 biggest U.S. banks collectively reduced their loan holdings by 8% in the year through March while deposits climbed 16%, producing a combined loan-to-deposit ratio that now sits at 53.9%. That’s the widest gap between big banks’ capacity to lend and their actual lending in 36 years of weekly Fed data.

Had the largest U.S. banks maintained their lending level of this time last year, they’d have an additional $1.37 trillion of loans on their books today.

Banks typically report lower loan demand around the same time that they tighten lending standards, Fed survey data show, making it difficult to assess which comes first.

There are some signs of hope, lending executives said. Bank of America Chief Financial Officer Paul Donofrio told journalists Thursday that his company expects some loan growth as the economy expands. At Citigroup, CFO Mark Mason said that consumer spending on the bank’s credit cards is roughly flat compared with last year -- a promising sign after consumers pulled back as a result of Covid-19 -- and the bank will try to juice credit-card borrowing with new incentives.

“This is the healthiest we have seen the consumer emerge from a crisis in recent history,” Citigroup CEO Jane Fraser said.

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