If regional banks show signs of accelerating loan growth when they report earnings in the coming week, this could signal an easing of supply chain bottlenecks that have weighed on the economic recovery. the United States after the pandemic, analysts and investors said.
Overall, small banks accounted for 63% of the roughly $ 520 billion in loans under the federal paycheck protection program launched in response to the pandemic. The program allowed small businesses to take out loans that could be canceled or would have an interest rate of 1%, according to the US Small Business Administration.
The growing demand for new loans at higher interest rates could indicate that small businesses are securing their stocks and expanding, said Dave Ellison, portfolio manager at Hennessy Funds.
“It seems like everyone has benefited from the reopening of the economy, except the banks, because you’ve seen very little loan growth” because of the paycheck protection program, Ellison said. “The pandemic has disproportionately affected small businesses, and these are the customers of regional banks,” he said.
As of June 30, small banks held 15% of total banking sector loans, but a disproportionate share of paycheck protection program loans, at 31%, according to the Federal Deposit Insurance Corp.
Overall, commercial loan growth fell 12% in September from a year earlier after hitting a low with a 16.3 %% drop in annual loan growth in May, data shows. from the Federal Reserve and Oppenheimer. Still, rising inventories at auto suppliers and retailers are expected to support loan growth over the coming year, said Chris Kotowski, analyst at Oppenheimer.
“It seems likely to us that the next significant move is up – not down – for the simple reason that it can’t go down as much as it already has,” said Chris Kotowski, analyst at Oppenheimer. .
A healthy increase in new loans to regional banks would be a strong signal that supply chain problems are moderating, said Steven Comery, analyst at Gabelli Funds.
“If customers can’t get their products to market because of the supply chain, they won’t borrow to build up their inventory,” he said. “If we see signals that supply chain issues are not going away, it will impact earnings estimates through 2023.”
The four largest U.S. banks reported mixed lending growth when releasing their results on October 14. J&P Morgan said loans were up 5% from a year earlier, while Bank of America and Wells Fargo reported declines.
Companies such as First Community Bancshares Inc, First Midwest Bancorp Inc and Zions Bancorp are expected to report results on Monday, while Fifth Third Bancorp O> and United Community Banks Inc are among those expected to report on Tuesday.
On Wednesday, Oct. 13, shares of First Republic Bank rose 1.5% after the regional bank issued about $ 15 billion in new loans and reported that its average loan balance under the debt protection program paychecks had fallen 39% in the quarter. These gains in new loans will make it likely that the bank will raise its forecast in the coming quarters, noted Casey Haire, analyst at Jefferies.
Concerns over regional bank lending growth come at a time when sector stocks are trading near record highs. Regional banks in the S&P 500 are up nearly 37% for the year to date and are just below the peak they reached on October 8, according to data from Refinitiv.
Despite these gains, regional banks remain attractive based on valuations, Ellison said.
Regional banks in the S&P 500 are trading at a forward price-to-earnings ratio of 13.5, well below the 21.2 in the broad S&P 500, according to data from Refinitiv. Valuations will likely rise alongside the benchmark 10-year Treasury yield, which is used to set rates on loans, including mortgages, Ellison said.
“Valuation is not a problem for future earnings,” he said.