Should investors take notice of the slowdown in bank lending?

David Knutson

David Knutson

Head of Credit Research, Americas

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What’s behind the lending slowdown?

Since late 2016, bank lending growth in the US has been slowing, but why?

If the US economy is doing as well as the “soft” data indicates, bank lending should be perfectly healthy. Even so, the latest Federal Reserve (Fed) data shows that total loans and leases at commercial banks are up just 3.8% year-on-year (yoy). This compares to growth of 6.4% for all 2016 and 7.6% as of late October.

The biggest slowdown has been in loans to businesses; up just 2.8% yoy versus 8.9% growth in October. Yet we think it is noteworthy that there has been a decline in borrowing across the board. Mortgages, consumer loans, commercial property and commercial & industrial (C&I) are all down.


One possible explanation is that corporations are taking advantage of historically low yields and tapping the bond market instead of using traditional financing - through banks - for debt.

Another important factor is that US companies are debt-heavy. In fact, for the last two years, US bank loan growth has exceeded its historical average; this could just be a mean reversion. Furthermore, energy companies have slowed down their borrowing capital expenditures in the wake of the commodities downturn.

Stick or twist?

Political uncertainty also seems partly to blame. Consumers and businesses may be expressing greater confidence since the election, but could still be hesitating to take out big-ticket loans to fund new projects until they have greater clarity on the outlook for tax, trade and healthcare policy. Our view is that many companies are indeed waiting for clarity on tax reform (specifically interest deductibility and depreciation), capital treatment of corporate lending, infrastructure spending, healthcare changes and trade policy reform.


We will continue to look for more detail from bank management teams in this and the next bank earnings season. We expect that Q2 loan growth will be slower than consensus. Loan growth should improve during the second half of H2, but not as much as the market expects.

However, as to whether investors should be worried, fundamentals remain in good shape overall. Bank liquidity remains robust, industry-wide asset quality is good and the White House’s pro-growth agenda should benefit C&I lending through greater infrastructure spending.

This suggests that the current slowdown in lending should not be the beginning of a long-trending economic slowdown.