By Ben Eisen
Last year was a banner one for debt, but it didn't look that way
for America's big banks.
Large U.S. lenders saw their loan books shrink in 2020 for the
first time in more than a decade, according to an analysis of
Federal Reserve data by Jason Goldberg, a banking analyst at
Barclays. The 0.5% drop was just the second decline in 28
years.
Bank of America Corp.'s loans and leases dropped by 5.7%.
Citigroup Inc.'s loans dropped by 3.4% and Wells Fargo & Co.'s
shrank by 7.8%. Among the biggest four banks, only JPMorgan Chase
& Co. had more loans at the end of the year than the start.
Lenders are flush with cash that they want to put to use, and
executives say they are hopeful loan growth will pick up in 2021.
Brisk lending typically suggests there is enough momentum in the
economy to give companies and consumers the confidence to borrow.
But the current weakness suggests questions remain about the vigor
of the economic recovery.
For banks, this weighed on profit. Net interest income, the
spread between what banks charge borrowers and pay depositors, fell
5% across the industry last year--a consequence of shrinking loan
portfolios and near-zero interest rates. It was the biggest drop in
more than 80 years of record-keeping, according to research by Mike
Mayo, a banking analyst at Wells Fargo.
At the start of last year, it didn't look like this would
happen. When the pandemic first hit, big companies rushed to draw
down credit lines from their banks, fearful they wouldn't be able
to raise money from investors in the bond market. The loans on bank
balance sheets spiked.
But government intervention came in the form of looser monetary
policy and gargantuan fiscal stimulus. The Federal Reserve enacted
a series of measures that calmed markets and allowed companies to
start issuing their own debt again. Congress passed a bill to dole
out money to small businesses and households.
Markets thawed, and companies including Mondelez International
Inc., VF Corp. and Whirlpool Corp. rushed to issue bonds to repay
the credit lines they drew down. The record-breaking bond boom
moved debt from bank balance sheets into the hands of investors.
The initial growth in banks' commercial and industrial loans almost
entirely reversed as the year wore on, Mr. Goldberg said.
Other companies paid back credit lines because business held up
better than expected and they didn't want to pay the interest
costs, said Tom Hunt, a director at the Association for Financial
Professionals, an industry group for corporate treasurers. "This
was more of a liquidity crisis than anything," he said.
Some banks have large businesses underwriting debt, and growth
in those units served as an offset when companies tapped the bond
market. Bank of America, Citigroup and JPMorgan all posted higher
revenue from debt underwriting.
But a deep recession meant that companies weren't turning to
banks as much for loans to build new warehouses, finance new
product development or otherwise spur growth. What's more, some
banks tightened lending standards as they battened down the hatches
during the pandemic.
Loan books would have shrunk more if not for government support
for small businesses. Banks doled out hundreds of billions of
dollars in loans through the Paycheck Protection Program. Those
loans have stacked up on bank balance sheets, but are slowly being
whittled away as the government forgives them.
Banks are also footing fewer bills for individual customers.
Many, like Kelly LaBanco, a makeup artist living in Chicago, have
tried to buy less on credit cards so they don't risk overspending.
Work trailed off for her during the pandemic, and she has used
unemployment benefits for most everyday expenses.
Ms. LaBanco estimates that she charges about half as much on her
airline-branded credit card as she did before the pandemic. When
she thinks about splurging on something using the card, she said,
"There's that little devil on your shoulder like, 'Girl, you're not
working.'"
Americans also used stimulus checks and expanded unemployment
benefits to pay down their credit-card balances. Credit-card debt
declined sharply through the first nine months of last year,
according to data from the Federal Reserve Bank of New York.
Low rates propelled a bonanza in the mortgage market, leading to
a record year for the home-lending industry. But for banks, the
benefit was limited. For one, most mortgages get packaged into debt
securities and sold off to investors, meaning the initial lender
isn't typically the party that collects interest on the debt.
What's more, nonbank mortgage firms grew disproportionately over
the past year, picking up market share as banks tightened lending.
In the first nine months of 2020, nonbanks made two thirds of
mortgages, according to industry research group Inside Mortgage
Finance.
Bank executives say they expect loan growth to pick back up this
year, but the timing depends on the pandemic and the government's
response to it. Executives at Citigroup, for example, indicated
that a key factor will be when another round of stimulus is passed
in Congress, as is currently being discussed.
"If we see that take hold sooner, we could see higher levels of
volume and loan growth and obviously that would be beneficial,"
Citigroup Chief Financial Officer Mark Mason said on a call with
analysts last month.
Write to Ben Eisen at ben.eisen@wsj.com
(END) Dow Jones Newswires
February 10, 2021 05:44 ET (10:44 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.
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