Business-loan growth fell to its lowest levels since the aftermath of the financial crisis in the final weeks of 2017, a puzzling development that could weigh on bank earnings later this month.
Bank loans to companies grew 1.1% from a year earlier as of Dec. 20, up slightly from a 0.8% rate the prior week, according to Federal Reserve data. That Dec. 13 level was the lowest since spring 2011, when banks were just starting to lend to companies again after the financial crisis.
The readings likely cement 2017 as the worst year for this type of lending in recent history. The average weekly rate of business-loan growth was 2.7% for 2017 through Dec. 20, compared with 9.3% in 2016 and double-digit growth in the two years before that.
Bankers are scratching their heads at the sluggish expansion. After President Donald Trump’s election in November 2016, bankers and investors predicted that pro-business policies would lead to a surge in corporate borrowing. Instead, the rate of corporate-loan growth slowed markedly.
Lending profits at banks largely depend on the dynamic between loan growth and interest rates. While recent increases in short-term rates have made floating-rate commercial loans more lucrative, the benefit has been limited because banks aren’t making many more loans. Banks start reporting fourth-quarter 2017 earnings in mid-January.
Analysts say the prolonged slowdown in commercial-loan growth may simply be a function of the metric returning to the normal levels of recent decades. Many bankers, however, believe that borrowers have been sitting on the sidelines waiting for the right time to borrow, creating pent-up demand for loans that will be unleashed any day now.
Some are hoping the U.S. tax-code overhaul, which cuts the corporate tax rate, will open the floodgates. The legislation was signed into law late last month.
“They have been waiting for some certainty here to figure out what to do to plan across three- to five-year periods, which they as entrepreneurs and CEOs have to do. So I think it will unleash some activity, no question,” Bank of America Corp. Chief Executive Brian Moynihan said of the tax changes in early December before the final bill was unveiled.
Others have lower expectations. “I’m not sure how much pent-up demand there is,” Harris Simmons, chief executive of Salt Lake City-based Zions Bancorp, said in December. “The lack of loan demand mystifies me somewhat.”
Appeared in the January 3, 2018, print edition as ‘Business Loans Hit By Late 2017 Slump.’