U.S. banks have significantly tightened underwriting standards, causing industry loan growth to cool in the last three months of 2022.

Gross loans increased by a median 2.2% sequentially across the 15 largest publicly traded U.S. banks in the fourth quarter of 2022. That was better than the sequential growth of 0.7% a quarter earlier, but weaker than the 4.4% sequential increase in the second quarter, according to S&P Global Market Intelligence data.

The last three months of each year are usually supported by seasonal factors; the seasonally adjusted data from the Federal Reserve shows a consistent slowdown since the 2022 second quarter. Bank loan growth adjusted for inflation has probably turned "flat to slightly negative" in the U.S., BofA Global Research economists said in a note to clients. The number of banks reporting tightening standards for large commercial borrowers is close to the peaks experienced over the last four recessions, the economists said.

"The emerging loan picture is becoming more sobering for an area that has been a real industry bright spot the past few [quarters]," Piper Sandler analysts wrote in a research note.

Widespread commercial tightening

Commercial and industrial loans, a particularly cyclical category, increased by a median 2.8% at large banks in the final quarter of 2022.

Signs pointing to slowing in that segment are also picking up. The net percentages of banks reporting tightening standards for companies of all sizes were above 43%, according to the Fed's senior loan officer survey published in February, up from a range of 31.8% to 39.1% in the previous quarterly survey. Net percentages pointing to weaker demand jumped by more than 20 percentage points sequentially to a range of 31.3% to 42.2%.

Commercial line utilization stabilized in the last couple of months of 2022 and into the start of 2023, Wells Fargo & Co. CFO Michael Santomassimo said at a conference in February. Demand "has moderated quite a bit" as some clients continue to invest, Santomassimo said, but others are hunkering down.

The breadth of tightening across commercial real estate loans appeared to be even greater with net percentages of banks reporting tougher standards exceeding 56% across the multifamily, nonfarm non-residential, and construction and land development sectors, according to the Fed survey. A net 68.2% reported weaker demand for nonfarm, non-residential CRE loans.

JPMorgan Chase & Co. CFO Jeremy Barnum said he expects that wholesale loan growth will be "relatively modest" in 2023, depending on the economy.

Still charging it

Consumer loans were up a median 1.9%, while single-family mortgage loans, where portfolios are heavily influenced by balance sheet management decisions as opposed to origination levels, were up 0.8%.

Credit card portfolios, which represent about half of total consumer loans, excluding mortgages, have rebounded rapidly since early 2021 to well above pre-pandemic levels.

Banks have reported tightening standards for cards, though not as broadly as for commercial loans, along with a more modest dip in demand.

Nevertheless, Barnum said JPMorgan Chase still expects credit cards to be a tailwind for net interest income this year as revolving balances per account, which remain below pre-pandemic levels, move higher.

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Loans down so far in 2023

Through roughly the first half of the 2023 first quarter, commercial and industrial loans were down 0.5%, according to the available weekly Fed data, and roughly flat after seasonal adjustment. Card loans were down 2.6%, but up 2.6% after seasonal adjustment.

Overall, bank loans were down 0.4%, but up 1.0% after seasonal adjustment.