PNC’s Demchak does not share rivals’ optimism about loan demand

Regional bank CEOs are at odds so far this earnings season over the prospects for commercial loan growth.

Top executives at Citizens Financial and Truist Financial are predicting a rebound in the second half of the year, but PNC Financial Services Group CEO Bill Demchak said the outlook is murky because businesses don’t seem to be gearing up for a rebound yet.

“We could sit here and tell you … and I watched some of these calls … that the back half of the year is going to be great, everything will be wonderful — I hope they’re right. And if they’re right, we’ll do really well,” Demchak said on a call with analysts Friday. “But I can’t promise you that specific time. … By the way, nobody else can either.”

“There’s pent-up demand that will be unlocked” when offices reopen and consumers begin spending again, says Citizens Financial’s Bruce Van Saun, who anticipates businesses will start borrowing more later this year. But slow investment in investory and equipment makes PNC’s William Demchak more circumspect about predicting when the bounceback will occur.

Businesses have been slow to take on new debt to build out their inventories even as local economies are reopening and COVID-19 vaccines are being broadly distributed. That hesitance has stalled loan growth for regional banks that lean heavily on commercial lending.

The $468.2 billion-asset PNC reported $238.1 billion in total loans for the first quarter, down 3% from the previous three months and down about 2% year over year. The credit-line utilization rate among big commercial customers was the lowest the Pittsburgh company has ever seen, Demchak said. The company didn’t disclose that figure, but it was 57% below last year’s peak, when companies raced for cash, Demchak said.

Loans at the $187 billion-asset Citizens, in Providence, R.I., fell 1% from the prior quarter and 4% year over year to $122 billion. Total commercial loans declined 9% from the first quarter of 2020 to $60.4 billion, while consumer loans were flat compared with the year-earlier quarter.

On a conference call Friday, Citizens executives said they anticipate overall loan growth in the range of 1.5% to 2% for the year, with consumer demand normalizing sooner and commercial demand accelerating later in the year.

Chairman and CEO Bruce Van Saun cited a number of reasons he’s optimistic that companies will want to borrow later this year: U.S. GDP growth projections are rising, retail sales are up, and the pace of vaccination has picked up.

As more adults are vaccinated and return to “life as we knew it,” companies will want to capture some of that pent-up consumer demand, he said.

“How fast do offices reopen and how fast do people get back into the routine and start spending money on freshening their wardrobes? Are we in a really sweet spot for growth broadly?” Van Saun said. “There’s pent-up demand that will be unlocked when those things happen. Businesses will have to get in position to meet that demand.”

Kelly King, CEO of the $518 billion-asset Truist in Charlotte, N.C., said he was confident lending will pick up in the back half of the year. Total loans and leases at Truist dropped 2.7% from the previous quarter to $295 billion.

“We believe as we head into the second half, we will have a snapback economy,” King said during the bank’s call Thursday. “This economy was not wounded before we headed into this. We simply shut it down for appropriate reasons. Now, we’re beginning to see the opportunities that we believe could happen. … Turning it back on is easier than it might have been on the other types of economic pressures that we’ve seen.”

Lower loan balances are expected to pressure bank earnings “over the near-to-medium term,” analysts at Fitch Ratings said in a note Friday.

“Loan growth, which substantially drives net interest income, is expected to remain negative amid soft commercial and consumer demand,” the Fitch analysts said in the report.

Lending was buoyed last year by the Paycheck Protection Program, but the emergency loans are starting to run off banks’ books as the program winds down. Meanwhile, deposits have remained high, putting a financial pincer on balance sheets. Deposits at PNC, for example, totalled $375 billion in the first quarter, up about 18% from a year earlier.

“We look at [PPP] as akin to a cowboy having arrived in the nick of time to save the day in an old Western town,” said Scott Siefers, an analyst at Piper Sandler,wrote in a note to clients in March. “The job is largely over, and the cowboy begins to ride into the sunset.”

For now, banks are using massive reserve releases to cover the gaps in low growth and boost profits.

PNC’s net income of $1.7 billion in the first quarter more than doubled year over year thanks considerably to a $551 million reserve release.

Citizens reported first-quarter net income of $611 million, compared with $34 million in the first quarter of 2020. The company reported a $140 million reserve recapture, compared with a $600 million provision for credit losses for the same period in 2020. Executives said Friday that they anticipate Citizens will continue to release loan-loss reserves as the economic outlook improves.

While many of Citizens’ corporate clients will have excess cash to burn through before borrowing again, Van Saun anticipated that eventually they will tap existing credit facilities or open new ones to build inventory or pursue deals.

“If there are any skeptics, I think they’re not doubting that it will eventually happen — it’s more around the pace,” Van Saun said. “We think it’s going to happen a little faster. We’re optimistic.”

PNC’s internal modeling shows that business lending, particularly for inventory builds and equipment investments, should be climbing at a higher pace relative to the current economic pickup. Activity could be held up because of the pandemic’s continued constraints on supply chains, Demchak said. Whatever the hold up, Demchak said he is certain loan growth will return, but the company is not forecasting when yet.

“I guess it’s just hesitancy waiting for more certainty on the pandemic,” Demchak said. “But when that happens, and it will happen, it almost mechanically has to happen, you’re going to see pretty appreciable loan growth. We just don’t know when that’s going to be.”

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