Banks appear set to post another quarter of sluggish loan growth in earnings reports starting late this week as more expensive deposits helped restrain their appetite for lending.

Loans at domestically chartered banks in the US increased 0.7% from June 28 to a seasonally adjusted $11.165 trillion at Sept. 27, a period that roughly corresponds with the third quarter, according to the latest weekly data from the Federal Reserve. Credit demand has been declining because of higher interest rates, and banks have been tightening standards to protect against defaults and have been more selective about clients as higher funding costs have eaten into the marginal profitability of additional loans.

Deposits did hold about steady during the period, increasing 0.3% from June 28 to a seasonally adjusted $16.087 trillion at Sept. 27, though the result reflected a 16.5% increase in more expensive, large time deposits to $1.363 trillion. Otherwise, deposits were down 1.0%.

Stagnant balance sheets

With funding dear, banks continued to allow securities holdings to drain away, posting a 2.3% decline from June 28 to a seasonally adjusted $4.851 trillion at Sept. 27.

Overall, assets have been on a downward trajectory in recent periods but increased 0.4% from June 28 to a seasonally adjusted $19.931 trillion at Sept. 27.

Cash increased 4.2% to $2.101 trillion. Cash levels surged in the first quarter as banks added wholesale borrowing and built up precautionary liquidity in response to the deposit runs in March. By the second quarter, they were sufficiently comfortable enough to unwind much of the cushion, with cash and borrowings dropping substantially.

Borrowing increased 0.8% from June 28 to a seasonally adjusted $1.334 trillion at Sept. 27.

In lending, credit cards continued to stand out as an exception to the overall trend of soft growth, increasing 2.4% to a seasonally adjusted $1.016 trillion.

Broadly, "core loan growth appears to be relatively stagnant in banks of all sizes," Fed Vice Chair for Supervision Michael Barr said in an Oct. 2 speech, citing weaker demand and tighter standards.

Bigger lines

Banks' unused credit lines continued to increase in the first half despite the reduced appetite for lending.

Industrywide unused lines increased $245.91 billion to $9.815 trillion, according to data from S&P Global Market Intelligence.

That includes an increase in unused consumer credit card lines of $152.97 billion to $4.062 trillion. While card borrowing has outpaced line extension in recent periods, credit line utilization rates remain below pre-pandemic levels, analysts at BofA Global Research said in a Sept. 22 note. That "indicates that consumers are still sitting on dry powder which should allow them to sustain their spending."

While banks have toughened standards, "there has not been a sharp contraction in credit that would significantly slow economic activity," Fed Governor Michelle Bowman said in an Oct. 2 speech.