Loan growth at U.S. banks likely remained challenged through the third quarter despite bankers' prior guidance for a strong second half.
U.S. banks begin reporting third-quarter earnings on Oct. 12, and equity analysts expect third-quarter earnings to be weighed down by tepid loan growth and growing deposits, headwinds that have dragged on U.S. banks' earnings since the onset of the COVID-19 pandemic. Reserve releases boosted U.S. banks' earnings in the past two quarters, but that trend might taper in the third quarter, analysts said.
Of the 31 public banks between $25 billion and $100 billion in total assets with at least six GAAP EPS estimates from analysts, consensus estimates suggest a linked-quarter earnings decline for 24 banks.
"Earlier in the year, there was optimism that growth would accelerate in the second half of 2021. And it does not appear that through the third quarter, there was consistent growth across the industry," Stephens analyst Terry McEvoy said in an interview. "Commentary over the next few weeks should support building pipelines and modest growth expectations in the fourth quarter, but brewing optimism as we look out into next year."
Increased loan paydowns, consumers still holding onto cash and uncertainty surrounding the tax, regulatory and economic backdrop is "holding loan growth hostage," Raymond James analysts wrote in an Oct. 7 note.
While organic loan growth likely remained muted through the third quarter, "differentiating" factors such as strength of local economies, hiring efforts and niche loan segments may boost some institutions' loan growth, according to D.A. Davidson analyst Kevin Fitzsimmons.
"A lot of it may also have to do with pricing and the willingness of management to entertain some of the more competitive loan pricing," he said in an interview. Additionally, McEvoy said commercial real estate, auto, and equipment finance could be "pockets of growth" for some banks during the quarter.
Though loan growth is unlikely to appear in third-quarter earnings reports, the key metric should bounce back in the fourth quarter or early 2022, wrote Wedbush Securities analysts in a Sept. 29 note. The analysts project most regional banks would book incremental loan growth of $500 million to $1 billion if line utilization increased by 1 percentage point. The analysts highlighted "tremendous earnings leverage" on banks' balance sheets given the excess deposits and line utilization rates near record lows. And the analysts see an investment opportunity in the regional bank space, upping their price target for the space to a 13.7x multiple on earnings, up from 12.5x and compared to current levels of 11.3x.
While bankers will likely remain upbeat about loan pipelines during earnings season, excess liquidity and attendant net interest margin pressure will ramp up competition for loans among banks, which "limits upside to loan growth," B. Riley Securities analyst Steve Moss wrote in an Oct. 6 note.
Both Fitzsimmons and McEvoy expect institutions to sit on most of their excess liquidity in anticipation of returned loan demand. But some banks could boost income by investing in securities as the cash sticks around longer than initially expected, Fitzsimmons said.
Buy now, pay later, or BNPL, could be one route more banks look to use their excess cash on as they hunt for loan growth, McEvoy said. Regional banks may give color about establishing partnerships with fintechs in the space or acquiring BNPL platforms on third-quarter earnings calls, he said.
On credit, negative provisioning boosted many U.S. banks' earnings over the past two quarters, but that may ebb in the third quarter over concerns about the delta variant of COVID-19, analysts said. There is still "plenty of ability" to release reserves from the historic highs seen at the onset of the COVID-19 pandemic, but "banks may use that uncertainty to taper the pace a little bit from what they otherwise might do," Fitzsimmons said.
McEvoy believes banks will continue to release reserves into 2022, but "pretty aggressive releasing may be behind us," he said.