September 26, 2018

Garnet Capital – Strategies For Loan Growth: Weak Loan Growth: Will Banks Have a Turnaround? (Part 4 in a 4-Part Series)


The economy continues to roar, but it isn’t helping banks in terms of their loan growth. Loans overall and C&I lines continue to experience much weaker growth than a few years ago. Not only that, but promising upticks in loans earlier in the year have now decelerated. Unless a turnaround occurs in the second half of the year, this seems likely to affect small and midsize banks and credit union earnings going forward, and ultimately, their stock prices. 


Despite a strong economy, banks suffered from weak loan growth in 2017. Loan growth in banks across the board rose just 5% this year as of the second half of June. Commercial and industrial (C&I) loans rose to 6.5% earlier this year, but even that promising figure is notably below the double-digit gains of several years past. 

Banks are experiencing weak and decelerating loan growth.

Now, unfortunately, they are seeing deceleration from the earlier rebound. Overall loan growth rose just 4.7% through mid-August, and C&I loan growth, at an increase of 5.7%, has fallen below earlier-in-the-year levels. 

Trade and Interest Rate Concerns to Blame?

Given the robust economy, the Wall Street Journal calls the sluggish and decelerating growth a “mystery.” But if culprits can be tapped, it’s likely the uncertainty caused by President Trump’s trade policies and the prospect of climbing interest rates that may have caused both businesses and consumers to place their borrowing plans on hold.

Wall Street, however, is unequivocal: they’ve been waiting for an uptick in loan growth, and they aren’t getting it. Weak loan growth is bad news for earnings because it means banks are booking fewer earning assets.

In fact, regional and midsize banks and credit unions especially have been looking for strengthening loan growth to fuel a climb in their corporate earnings. Recently, analysts at Morgan Stanley indicated that nearly half, 13 out of 28, midcap banks they follow won’t meet the company’s own annual earnings forecasts unless there is a significant pickup in loan growth during the year’s second half. This group includes Comerica, Fifth Third Bancorp, and M&T Bank.

The KBW Regional Banking index has risen 6.3% on the year, more than the 3.3% climb of KBW’s large bank index. It remains to be seen whether accelerating loan growth will turn regional and smaller banks earnings around, but it appears that their stock prices may not have much further to go given the loan growth picture.

Interest rates may be contributing to bank loan weakness.

When a Loan Sale Advisor Can Help

Trade policy issues, uncertainty, and climbing interest rates can create uncertainty and volatility for financial institutions — especially those struggling with sluggish loan growth.

One way to address this issue is to either purchase bulk portfolios or partner with an originator to purchase the types of loans your institution wants on a flow basis. The seasoned loan sale advisors at Garnet Capital can facilitate those purchases and partnerships. Sign up for our newsletter today.