Community bankers bullish on loan growth, torn on infrastructure plan

More community bankers are upbeat about the upcoming year’s prospects for loan demand than at any point since 2017, as the U.S. economy recovers from the COVID-19 pandemic, a new industry survey found.

About 68% of executives said they believe demand for new loans will improve over the next 12 months, up from 47% who reported the same outlook at the end of last year, according to the IntraFi Network survey of CEOs, presidents and chief financial officers of more than 500 banks with up to $10 billion of assets.

The findings come as executives of large, publicly traded banks are split on the timing for a resumption of loan growth — with some anticipating a second half surge in new business while others are more cautious.

Community bankers’ expectations have made a sharp turn since the second quarter of last year, when just 36% expected a pickup in borrowing as the pandemic took hold and the economy shuttered.

“That was a little surprising,” Paul Weinstein, a senior adviser at IntraFi, said about the size of the jump in outlook among community banks. “Part of that must be the economy is recovering, and they’ve seen some jumps in loan demand.”

As more Americans get vaccinated and businesses reopen, there could be a pickup in new lending to manufacturers to boost the supply of components like microchips, Weinstein said.

The Biden administration’s $1.9 trillion infrastructure plan could bring even more loan growth. Some banks have even begun marketing financing packages to leverage potential government contracts.

Community bankers were mixed on how to fund the plans. About 36% of them expressed openness to paying for infrastructure in part by adding to the federal budget deficit. Another 26% of those surveyed expressed support for tax increases or spending cuts to offset the entire cost, while 35% said that an increase in infrastructure spending is not needed.

Even without the additional economic boost of infrastructure spending, about 60% of community bankers said in the survey they believed fiscal stimulus would lead to a “small bump” in inflation. However, just 26% predicted that there would be enough inflation to warrant some action by the Federal Reserve, such as raising interest rates.

Given the massive fiscal and monetary support the Fed and Congress provided to the economy during the pandemic, Weinstein said, the low expectations for inflation are “quite amazing.”

“It’s a record amount of stimulus,” Weinstein said.

The stimulus checks to U.S. adults have left banks so awash in deposits that they feel less pressure to compete with other banks. Just 7% of community bankers reported an increase in competition over the past 12 months, according to the IntraFi survey.

An increase in speculation in some financial markets, too, has attracted some bank attention to booming cryptocurrencies. The $468 billion-asset PNC Financial Services Group, for example, was in talks with crypto exchange Coinbase about a partnership and custody for wealth management clients before the crypto firm went public this year, CEO Bill Demchak said on an April 16 earnings call, though it’s unclear what came from the talks.

Community bankers are typically more hesitant to embrace cryptocurrencies. More than three-quarters of those polled by IntraFi said the use of crypto is not to be found in their five-year business plans. “That’s a pretty resounding no,” Weinstein said.

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