Weak loan growth is posing a headwind once again as US banks get ready to post third-quarter results, with hopes still hanging on rate cuts to spur credit demand in future periods.

Loans across domestically chartered US banks inched up just 0.4% from June 26 to Sept. 25, according to weekly data from the Federal Reserve, and were up 0.5% after seasonal adjustment. Bank credit growth has been anemic for more than a year, with total outstanding loans and unused commitments across the industry up just 1% from the year prior at June 30, according to semi-annual data compiled by S&P Global Market Intelligence.

"Loan growth outlooks could be at risk," Piper Sandler analysts said in a Sept. 23 note previewing third-quarter reports, reflecting the impact of high interest rates on demand, banks focusing on cultivating full client relationships instead of just lending, and caution in an election year.

Meanwhile, deposit growth has been modest but steady, hovering near 1% to 2% year over year since late March, according to the weekly data. With deposit growth of 0.7% from June 26 to Sept. 25 after seasonal adjustment exceeding loan growth, banks have been adding modestly to securities holdings.

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Rates and vibes

Banks have already pulled back on loan growth guidance this year after sometimes setting optimistic expectations for the second half.

Senior executives have offered somewhat varying conjectures over the reasons behind weak credit demand. At a conference in September, Truist Financial Corp. Chairman, CEO and President William Rogers Jr. emphasized the role interest rates play, saying that business owners probably do not "arbitrage" elections, and that while borrowers had "capitulated" to high rates six months ago, they are now looking for cuts to spur the economy. Wells Fargo & Co. CFO Michael Santomassimo said that in addition to cuts, the election is an uncertainty inhibiting confidence in a soft landing.

Bank economists do expect lending activity to firm over the next six months because of falling interest rates.

An American Bankers Association advisory committee made up of 15 senior economists at large banks projected in September that commercial and industrial loan growth would be 3.3% in 2025, up from an anticipated contraction of 0.2% this year, and that consumer credit growth would increase to 3.8% from 1.9%.

Credit card lending slowed in the third quarter, but remained ahead of lending overall on a seasonally adjusted basis at 1.0% from June 26 to Sept. 25, according to the weekly Fed data.

Unused consumer credit card line growth across US banks slowed to 2.4% year over year at June 30, according to S&P Global Market Intelligence data, and to 4.7% for commercial cards.

Deposits and securities

While deposit growth has been modest, the Fed's rate cut of 50 basis points in September should give banks an opening to ramp up preliminary efforts to rein in deposit costs.

For individual banks, much depends on the composition of deposit portfolios, with for example rates on commercial deposits likely to move down quickly, just as they moved up quickly when underlying interest rates were increasing.

Broadly, analysts expect pressure on asset yields to outpace relief on funding costs initially. "On the plus side, a big 50 basis point Fed rate cut likely gave banks more confidence to move aggressively on deposit pricing," Piper Sandler analysts said in an Oct. 3 note. However, "there is still lingering uncertainty regarding the [near-term net interest income] trajectory and how quickly lower funding costs can overwhelm lesser asset yield improvement than hoped."

Seasonally adjusted deposits across domestically chartered US banks increased $106.17 billion, or 0.7% from June 26 to Sept. 25, according to the Fed data, including a $26.25 billion, or 1.7% increase in large time deposits.

Holdings of securities increased $107.29 billion, or 2.1%, while other borrowings fell $62.57 billion, or 4.5%.