ABA Banking Journal
By James Chessen, ABA chief economist
WASHINGTON — “Strong loan growth, diversified revenue streams and a continued improvement in asset quality were the hallmarks of a very strong second quarter for America’s banking industry. The tremendous across-the-board increase in lending was the single biggest driver of higher bank earnings. Steadily improving asset quality and consistently higher capital paint a picture of a fundamentally strong banking sector that’s meeting the diverse needs of both consumers and businesses. U.S. banks are well positioned to continue making the loans that propel our nation’s economic growth.”
Second Quarter Marked by Strong Loan Growth
“Lending grew strongly in nearly every category, with a total increase exceeding $430 billion over the last year. Business loans were up more than $137 billion year over year and real estate lending has picked up steam. With the economy growing stronger and higher interest rates on the horizon, many businesses have determined that there’s no time like the present to borrow and kick expansion plans into high gear. Even with Fed action, interest rates will remain incredibly low by historic standards. We expect borrowing to remain elevated in the third quarter amid low interest rates, improving confidence and a stable economy.”
Increased Loan Demand Drives Higher Earnings
“Strong loan growth and diversification of non-interest income have served as a catalyst for higher earnings. The real revenue driver is a renewed demand for the industry’s bread and butter product – loans – as consumers and businesses grow more confident in a better economic environment. Banks continue to make loans to more people, which fuels economic growth. Demand for credit from small businesses has been particularly strong, which bodes well for job creation and an improving economy.”
Banks Prepared for Higher Interest Rates
“Banks continue to balance customer demand for long-term loans at low rates with the need to properly manage interest-rate risk. Institutions are actively engaged and continue to prepare for the return to a more normal rate environment.”
Banks Remain Highly Capitalized as Lending Takes Center Stage
“Banks remain highly capitalized at levels far exceeding the most stringent regulatory standards. The U.S. financial system is strong and well-positioned to withstand even the most vigorous economic shocks. With capital at such high levels, the focus has shifted toward putting it to work in the community through a greater number of loans to both consumers and businesses. With nearly $2 trillion in capital and reserves, banks are well protected from any economic circumstance that could arise.”
Bank Portfolios Continue to Steadily Improve
“We’ve seen a steady improvement in loan quality over the last five years and that trend should continue. Delinquent loans and charge-offs are down across the board due to prudent underwriting by banks and determined efforts by both businesses and individuals to keep debt at manageable levels. Problem loans are back to levels we saw eight years ago and losses have fallen to pre-crisis levels. Non-performing loans are one-third of what they were in 2010.”