"ALMOST ALL LOANS ARE BAD" -- WHY BANKS AREN´T LENDING / THE WALL STREET JOURNAL

‘Almost All Loans Are Bad’—Why Banks Aren’t Lending

Rising deposit costs and capital needs are making lenders pickier, at the cost of growth

By Telis Demos

Banks of all sizes are more reluctant to lend, with overall loan growth lagging far behind the long-term average pace. PHOTO: CLARISSA BONET FOR THE WALL STREET JOURNAL

Banks would love to lend more, but not to just anyone.

One way for American banks to offset the pressure coming from rising deposit costs would be to boost business: More loans, even if earning less individually, could still lead to overall revenue growth. 

But right now, their lending is expanding very slowly. As of the latest Federal Reserve weekly tally, overall loan growth at U.S. banks has been 3.6% on an annualized, seasonally adjusted basis so far in the third quarter—well below the long-term average of 7%, according to Autonomous Research analyst Brian Foran.

Some of that reflects weakening demand for loans, thanks in large part to rising interest rates that have made it much more expensive to borrow to buy homes or cars, as well as for companies to finance themselves. 

It also reflects credit caution in some sectors, such as commercial real estate, where landlords of mostly-empty office buildings might struggle to cover the higher cost of new loans.

Yet even if the economy were to stay strong, and consumers and businesses were to increase their appetites for borrowing, banks might still be reluctant to oblige. 

That is because banks will still be worried about ensuring the stability of their deposits, both to satisfy investors and regulators. 

And they will be dealing with rising capital requirements from a set of new Federal Reserve proposals.

With the Silicon Valley Bank and First Republic bank runs fresh in their memory, many investors are still watching deposits as an entry point to jump back into what appear to be very cheap bank stocks. 

S&P 500 banks are priced at about 8.7 times forecast earnings for the next 12 months versus a 10-year average above 11 times, according to FactSet. 

Banks rallied to start the week after M&T Bank last Friday gave a mid-quarter update that total deposits were up 2% from the second quarter so far. 

But banks will still need to increase their loan books to offset the pressure that comes with funding costs rising faster than yields generated by the loans.

For now, some banks have described themselves as being on a “diet” as they become much more selective about the risky lending and financing that they provide. 

Speaking at Barclays’ banking analyst conference this week, there was a common message: Attractively priced loans will be for the best customers.

Truist Financial said Monday that indirect lending, such as via outside mortgage originators or vehicle sellers, is going to be optimized in favor of the kind of lending that has the ability to “generate full relationships, deposit relationships, long-term wealth relationships.” 

Citizens Financial said “our pace of growth here will be guided by our ability to…drive a strong deposit profile,” and that “we will not be offering out capital and loans to those that don’t fully intend to bank with us and enter the relationship business.”

Even the biggest banks are feeling the pressure. 

Bank of America said that, at higher required capital levels, it would have to evaluate things such as how much of unused credit-card lines it can offer. 

JPMorgan Chase Chief Executive Jamie Dimon said the new set of capital proposals by the Fed imply that “certain things should not be held in the banking system. 

That’s what it means. 

Almost all loans are bad.” 

The proposal includes higher risk-weightings for loans such as certain types of mortgages.

Yes, Dimon might be trying to bend the ears of regulators. 

However, this doesn’t mean he is wrong that bank lending might slow. 

At the very least, it will keep the growth outlook shrouded in uncertainty.

Focusing on making better loans to better customers is definitely a good thing. 

The problem is that there might not be enough of them to go around.