July 10, 2021 / VOLUME NO. 165
Waiting a Little Longer for Loan Growth 

While banks get ready to report second quarter 2021 earnings, all signs point to this increasingly obvious takeaway: Loan growth isn’t here yet. 

What is holding loan growth back, and how long must the industry wait? 

The coronavirus pandemic appears to be winding down in the United States, but the recovery remains uneven. And the economic rebound has yet to show up on bank balance sheets. Despite a July 2 estimate from the Atlanta Federal Reserve that second-quarter gross domestic product growth could hit 7.8%, most banks experienced lackluster lending activity during the second quarter and a weak start to the third quarter.

What’s known as H.8 data from the Federal Reserve, which provides an estimated aggregate balance sheet for all U.S. commercial banks, showed that commercial and industrial lending declined for more than a month before the end of the second quarter, wrote R. Scott Siefers, managing director at Piper Sandler & Co., in a mid-June report analyzing the data. Commercial real estate was “struggling to maintain some forward momentum.”

After removing Paycheck Protection Program loans from total commercial and industrial loans, C&I loan growth declined 4.3% quarter-to-date on bank balance sheets, from an original -1.5%, wrote Christopher Marinac, director of research at the investment bank Janney Montgomery Scott, in a June note to investors.

Those results bode poorly for a segment key to a sustained rebound. Marinac wrote that C&I represents almost a quarter of loans in the Federal Reserve data series, which “underscores a central challenge” for banks in growing loans overall. Outside of middling lending activity, the second quarter also could be noisy due to PPP forgiveness. 

“There are a couple things putting a wrench in our best-laid plans,” Siefers tells me right before the end of the quarter, confessing he thought loan growth would’ve been stronger. Corporations have high levels of cash on hand, which they can use instead of seeking out loans. Adding to factors complicating or holding back the full economic recovery, Siefers lists supply chain disruptions and labor shortages. The bright side is that he sees nothing that could truly derail the recovery and send the economy back into a recessionary tailspin. He believes all these variables will be resolved in time. Plus, some bank executives have reported promising activity around third quarter loan commitments and credit line usage.

“I think we’ve all been a little disappointed at how long it’s taking [loan growth] to manifest, but all the pieces are still in place,” Siefers says. “In my mind, we’ve got a pretty compelling story for a while; you have to have the patience to see it through.”

• Kiah Lau Haslett, managing editor of Bank Director
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