Loan growth remains soft, but another measure of credit extended by U.S. banks has already risen far higher than it was before the pandemic.

Unused credit lines across the industry jumped by 5.6% in the first half of this year to $8.917 trillion, according to S&P Global Market Intelligence data. That is, by a wide margin, the biggest semiannual increase in at least five years.

The data echoes bank guidance that loan origination pipelines are strong as businesses become more optimistic about the economic outlook. That has left some analysts hopeful that industry revenues are primed for a rebound, even if it could take some time to unfold as supply chain issues have limited inventory growth.

"That's where investors get excited," Michael Rose, an analyst at Raymond James, said in an interview. Bank stock prices have been supported by rising long-term interest rates, but to keep "the momentum going, I think investors are looking for that pickup in line utilization because in some cases, it can be very meaningful for growth and would obviously help" net interest income.

Plenty of capacity

The increase in unused credit lines is not a result of borrowers drawing down their balances: The $472.88 billion increase in unused lines over the first six months far outpaced a $5.66 billion contraction in outstanding balances over the same time. Overall, unused credit and outstanding borrowing totaled $19.778 trillion at June 30, more than $1 trillion higher than at year-end 2019.

At the same time, it is not clear businesses will take advantage of the increased credit availability. Companies could be securing credit lines to fortify backup plans after strains that emerged in commercial paper markets early in the pandemic, analysts at Keefe Bruyette & Woods wrote in an Oct. 4 note.

"A lot of banks have talked about" growth in lines, said BofA Global Research analyst Ebrahim Poonawala in an interview. "But how that translates into loan growth, I don't think it's as straightforward."

If businesses do utilize their credit lines, it could be a boon for banking profitability. In a note on Sept. 27, Raymond James' Rose calculated that if utilization returns to year-end 2019 levels, loan growth could be 75% or more higher than what the consensus has penciled in through the end of 2022 at several banks, including Wells Fargo & Co., PNC Financial Services Group Inc., Truist Financial Corp. and U.S. Bancorp.

It took a long time for loan growth to reappear after the Great Recession of 2008-2009. Seasonally adjusted commercial bank loans did not recover to their October 2008 peak until June 2013 — an interval of almost five years — according to Federal Reserve data.

Recovery has been quicker this time around. Economic output started a rapid comeback in the middle of 2020 after a short freefall. Overall borrowing from nonfinancial corporations, through both debt securities and loans, surged by 11% from the end of 2019 to the middle of 2021, according to Fed data, as businesses tapped wide-open capital markets.

"Banks are starting to see more than green shoots," said Anton Schutz, president of Mendon Capital Advisors, an investment firm that focuses on banks. "It's starting to come back across the entire country."

Looking ahead

Still, the supply chain issues are unlikely to ease right away; utilization is "probably going to remain pretty depressed for at least the next couple of quarters," Rose said.

Rose is more optimistic about a near-term loan growth recovery for small and midsized banks, as opposed to larger banks that tend to focus on corporate borrowers that have vast resources. Smaller business borrowers might not be able to access capital markets, making them more reliant on credit lines from banks, he said.

An unmistakable turn in loan growth has not yet appeared in the most recent data. Total seasonally adjusted loans across U.S. commercial banks were up 0.9%, or $95.54 billion, from June 30 to $10.455 trillion at Sept. 22, according to the Fed. That includes a 1.8%, or $44.69 billion, decline in commercial and industrial loans, which are still being weighed down by loan forgiveness under the Paycheck Protection Program. Commercial real estate loans were up 1.3%, or $31.70 billion, and consumer loans were up 1.4%, or $21.63 billion.

Recent commentary on the lending outlook by big banks has been mixed. Bank of America Corp. has said that commercial loans started to grow again in the second quarter even as revolving line utilization ticked down 20 basis points from the first quarter to 27.6%. "It is a fight out there" for loan growth, Chairman and CEO Brian Moynihan said at a Sept. 22 conference. At Wells Fargo, line utilization is "really low" and "not moving much," CFO Michael Santomassimo said at a Sept. 14 investor conference, reiterating that the bank is headed toward the lower end of its net interest income guidance.

"It seems there was, in addition to the normal summer slowdown, a little bit of a pause from the delta variant, and [Hurricane Ida] in some markets impacted growth a little bit," Rose said. "So I think you'll see some of those loan closings push to the fourth quarter."

BofA Global Research's Poonawala is nevertheless optimistic that loan growth will accelerate as supply chain issues recede and inventories build. "Absent any additional disruption tied to COVID, I think it's a first-half 2022, spring/summer event," he said. "As we come out of the holidays into next year, things should gain momentum."