Big banks' loan machines were firing on most cylinders in the second quarter, but a strengthening array of headwinds appears to be sapping momentum as banks toughen underwriting and interest rates rise.

Gross loans jumped by a median 4.4% sequentially in the second quarter across the 15 largest publicly traded U.S. banks, according to data from S&P Global Market Intelligence, rebounding from a median 0.7% increase in the first quarter. The second quarter is generally boosted by seasonal factors, but banks also cited dynamics like increased line utilization as businesses stock inventories and higher borrowing on credit cards.

However, banks have already started a broad tightening of loan standards as the economic outlook weakens, according to the Federal Reserve. A strong second quarter prompted Regions Financial Corp. to raise its outlook for loan growth for the full year, though the bank said the guidance implied holding loan levels about steady across the second half. "This is when you need to be very cautious, very careful and make sure your client selectivity is robust and ensure that you get paid for the risk that you're taking," CFO David Jackson Turner Jr. said during a conference call on the period's results.

Overall, growth should be sustained as higher interest rates lead to lower paydowns and banks work through robust pipelines built up in the first half of the year, said Matt Pieniazek, president and CEO of Darling Consulting Group, which helps banks manage their balance sheets. But "we've actually been seeing, on average, production levels starting to decline. So we think that there's going to be a slowdown in net loan activity as we get deeper into the year and into next year."

Commercial split

Commercial and industrial, or C&I, lending continues to be a major pillar of the growth, with a median sequential increase of 6.7% in the second quarter across the 15 banks.

The Fed's senior loan officer survey published in August, reflecting responses for the second quarter due by the end of June, showed that demand from C&I borrowers continued to strengthen, including because of "increased precautionary demand for cash and liquidity." But the survey also showed significant net percentages of respondents reporting that they had tightened C&I standards and raised C&I loan spreads for the first time after about four consecutive quarters of easing.

Commercial real estate loans were down a median 0.6% sequentially across the 15 banks, where the Fed survey showed banks tightening standards and demand slipping except for the multifamily sector.

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Consumer resilience

Home mortgages were up a median 3.8% sequentially in the second quarter across the 15 banks, and consumer loans increased a median 4.1%.

Banks kept credit card standards about steady in the second quarter after six consecutive quarters of loosening, according to the Fed survey, and reported that credit card loan demand continued to increase.

Retail spending has continued to be resilient so far despite high inflation, and card balances have been climbing as major issuers like American Express Co. continue to plow money into acquiring new customers.

"We feel very good about it," Citigroup Inc. CFO Mark Mason said about the bank's credit card growth during a conference call on second-quarter results. "You've also heard us describing more marketing spend, more advertising spend, more acquisitions. ... We've been targeting growing our customer base there while staying within our risk appetite."

Slowdown

If a pivot is underway, it appears to have taken root early in the third quarter. Weekly Fed data shows that industrywide loans grew 1.3% from June 29 to Aug. 10 after seasonal adjustments, compared with a 3.8% increase from March 30 to June 29. Banks also reported that they generally plan to continue to tighten standards over the second half of the year across loan categories, according to the Fed survey.

JPMorgan Chase & Co. CFO Jeremy Barnum said his bank continues to see robust growth in areas like C&I and cards during its second-quarter report. But he declined to give an outlook for next year, saying "it's going to be very much a function of the economic environment."