Wall Street: Wall Street Week Ahead: Regional bank lending growth could portend healthier supply chains

NEW YORK: If regional banks show signs of accelerating loan growth when they report earnings in the coming week, it could signal an easing of supply chain bottlenecks that have weighed on the U.S. economic recovery from the pandemic, analysts and investors said.

Overall, smaller 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 forgiven or would have an interest rate of 1%, according to the US Small Business Administration.

Rising applications for new loans at higher interest rates could indicate that small businesses are securing inventory and expanding, said Dave Ellison, portfolio manager at Hennessy Funds.

“It seems like everyone benefited from the reopening of the economy, except the banks, because you saw very little loan growth” through the Paycheck Protection Program, Ellison said. “The pandemic has disproportionately affected small businesses, and those are the customers of regional banks,” he said.

As of June 30, smaller banks held 15% of total banking sector loans, but an outsized share of Paycheck Protection Program loans, holding 31%, according to the Federal Deposit Insurance Corp.

Overall commercial loan growth fell 12% in September from a year earlier after bottoming out with a 16.3% decline in annual loan growth in May, data from the Federal Reserve and Oppenheimer. Still, rising inventories at auto suppliers and retailers should support loan growth in the coming year, said Oppenheimer analyst Chris Kotowski.

“It seems likely to us that the next significant move will be up – not down – for the simple reason that it cannot go down as much as it has already,” said Chris Kotowski, analyst at Oppenheimer.

A healthy increase in new lending at regional banks would be a strong signal that supply chain issues are moderating, said Gabelli Funds analyst Steven Comery.

“If customers can’t get products to market because of the supply chain, they won’t be borrowing to build inventory,” he said. “If we see signals that supply chain issues don’t go away, that will impact earnings estimates through 2023.”

The four largest U.S. banks reported mixed loan growth when they released their results on Oct. 14, with J&P Morgan saying 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, October 13, shares of First Republic Bank gained 1.5% after the regional bank issued about $15 billion in new loans and reported that the average balance of its paychecks were down 39% in the quarter. These new loan gains will make it likely that the bank will raise its guidance in the coming quarters, noted Jefferies analyst Casey Haire.

Concerns over lending growth by regional banks come at a time when shares in the sector are trading near record highs. Regional banks in the S&P 500 are up nearly 37% year-to-date and just below the peak reached on Oct. 8, according to Refinitiv data.

Despite these gains, regional banks continue to look 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 of the broader S&P 500, according to Refinitiv data. Valuations will likely rise in line with the benchmark 10-year Treasury yield, which is used to set rates on loans, including mortgages, Ellison said.

“Valuation is not an issue for future earnings,” he said.

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