Look Out Below! Citigroup (C) Leads the Big Banks in Reporting Lower Loan Balances
Citigroup (C), Bank of America (BAC), Wells Fargo (WFC), and JPMorgan Chase (JPM) all reported lower outstanding loan balances in the first quarter.
CNNMoney is reporting that all told, average loans outstanding at the four banks dropped 7% from a year earlier – a decline of $210 billion — even as deposits rose 5%.
Citigroup showed the biggest drop with a decline of 13%.
This doesn’t seem to be too much of a surprise. If everything we’ve heard is true, Main Street is finding it harder to get credit, if indeed they want it at all.
According to a Nilson report by 2016 Americans will actually spend more money on debit cards than credit cards, in terms of dollars being pumped into the economy.
It’s a trend that began in 2005 and gained momentum at the onset of the financial crisis.
As a result businesses continue to struggle. It’s well documented that customers spend less money when using a debit card or cash to pay for their purchases.
What is at issue is how much banks, particularly those who received TARP funds are actually lending out to assist the recovery.
JPMorgan Chase led the way in the first quarter, lending out a reported $450 billion. Bank of America says it provided consumers and businesses with $144 billion in credit in the first quarter, while Wells Fargo reported $151 billion.
The banks cite a lack of consumer demand as the key reason for their shrinking loan balances.
“We got to where we are today by making good loans and making sound credit decisions,” Wells Fargo’s chief financial officer, Tim Sloan, said in an interview Wednesday.
And yes, even with all that shrinkage there are pockets of loan growth at the banks. JPMorgan Chase says loans to midsize companies rose every month last year, and Wells points to strength in auto dealer and commercial lending, along with the oft-questioned commercial real estate sector. “We love that business,” says Sloan.
But reduced consumer demand only takes you so far. A key reason for having fewer loans outstanding is because the banks are still taking losses on bad loans and letting other high-risk borrowers pay off their balances without having access to more credit.
And to be sure, all four banks have well documented concerns. Bank of America continues to work through the problems it inherited from its purchase of Countrywide, and Wells Fargo, as expected, is dealing with the issues that came with their acquisition of Wachovia.
Where all of this becomes problematic for the banks is when it’s becoming clear that they have a lot of cash on hand.
Average deposits at the four biggest banks rose by $154 billion over the past year, with Bank of America breaking $1 trillion in deposits for the first time and JPMorgan falling just $4 billion short of that mark.
As a result, all the big banks now have at least $1.06 in deposits for every dollar in loans outstanding. At this time a year ago, only JPMorgan was above $1 in deposits for each dollar in loans.
There is something to be said for banks having a lot of cash on hand, of course. As everyone but Dick Fuld learned from the crisis, running out of money makes it hard to persuade others of your firm’s franchise value. And of course it is hard to grow a business without reaching out to new users.
“We are glad to have a highly liquid balance sheet,” says Sloan. “Deposit growth gives us a chance to bring in new customers and cross-sell our products.”
Is that bad? No, but how that cash is deployed bears watching.
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