Loan Growth or Contraction?

April 18, 2013

By Jon Winick
Clark St. Capital

According to the Federal Reserve Beige Book, there is increasingly positive economic activity. The survey described steady to rising loan demand in most districts.

Loan demand was steady to slightly up at most District Banks that commented on lending. The Philadelphia District, however, said loan volumes softened somewhat since the previous report. The New York District noted widespread increases in loan demand, particularly for commercial loans and residential mortgages, and the Cleveland District said business and consumer loan demand picked up since the last report. The Dallas District saw broad-based improvement in loan demand as energy-related lending remained strong and commercial real estate and home equity lending bounced up from low levels. The San Francisco District said increased growth in automobile and mortgage loans spurred overall improvements in loan demand. Several Districts, including Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Dallas, and San Francisco, said loan pricing was very competitive.

Reports on mortgage lending were mostly favorable. Stronger refinancing activity was cited by the New York and Atlanta Districts. The Cleveland and Kansas City Districts noted a shift from mortgage refinancing to new purchases, and the New York, Richmond, Dallas, and San Francisco Districts reported an uptick in residential mortgage loans. Most District banks said credit conditions remained favorable, with improved credit quality for business and consumer loans.

This data contradicts the early earnings reports from the largest banks. JP Morgan Chase reported slower, but positive commercial loan growth from the prior quarter and contraction in consumer loans, as CEO Jamie Dimon described loan growth as “soft.” Bank of America and Citi had similar results. We will analyze the bank earnings in a few weeks, but this has been a confounding recovery for some time. Our quick take is that loan growth was inflated at the end of last year due to the fiscal cliff expiration, and that it may take a few quarters before loan growth becomes strong again. Certainly, the positive recovery in real estate, construction, and manufacturing should lead to more demand for credit.