The Truth about Bank Lending

23 Jan

The rhetoric from D.C. is deafening, but is it true that banks still aren’t lending? These accusations seems counterintuitive given that we are in the perfect storm for lenders – record low short term rates and a relatively steep yield curve.

By all accounts banks, like the Fed, should be “printing” money to the delight of their shareholders. Are they?

Together, Bank of America (NYSE: BAC) (11.9% of Domestic Deposits), Wells Fargo (NYSE: WFC) (9.8%), JP Morgan Chase (NYSE: JPM) (8.5%) and Citigroup (NYSE: C) (4.0%) control 34.2% of total domestic deposits. Now that the Big Four have reported, we have a good proxy for how far we have come since the dark days of 2008.

If you take a look at the numbers below, you can see that banks have indeed started lending. In, fact total loans outstanding for the Big Four increased 4.5% over the past year. However, that is still down 6% from the peak year of 2008. But I believe we can all agree that 2008 levels were unsustainable.

($ in Billions)
Loans Out

2008

2009

2010
% delta
’08-’10
Bank of America $931.4 $900.1 $940.4 1.0%
Y-O-Y Growth 6.3% (3.4%) 4.5%
Wells Fargo 864.8 782.8 757.3 (12.4%)
Y-O-Y Growth 2.4% (9.5%) (3.3%)
JP Morgan 744.9 633.5 692.9 (7.0%)
Y-O-Y Growth 43.2% (15.0%) 9.4%
Citigroup 694.2 591.5 648.8 (6.5%)
Y-O-Y Growth (10.8%) (14.8%) 9.7%
Total Big Four $3,235.4 $2,907.9 $3,039.4 (6.1%)
Y-O-Y Growth 7.2% (10.1%) 4.5%

More telling is the amount of loan loss provisions the Big Four have on their balance sheets. As a percent of loans outstanding, the Big Four have 4.53% of reserves for potential losses. As an aside, a topic for another time is the one clear outlier – Wells Fargo. I’m not sure what they know that the other banks don’t, but apparently the loans they make don’t stink! Without Wells, the average is 5.13%. WFC investors beware.

Reserves as a % of Year End Loans Outstanding
2007 2008 2009 2010 Average
Bank of America 1.32% 2.48% 4.13% 4.45% 3.10%
Wells Fargo 1.16% 2.43% 3.13% 3.04% 2.44%
JP Morgan 1.94% 3.11% 4.99% 4.66% 3.67%
Citigroup 2.07% 4.27% 6.09% 6.27% 4.67%
Total Big 4 1.58% 2.99% 4.45% 4.53% 3.39%
Ex WFC 1.78% 3.28% 5.07% 5.13% 3.81%

In absolute terms, the total amount of reserves grew 42.3% to $137.8 billion. Here too, Wells is an outlier having grown provisions by less than 10%. Wells seems to benefit from the Buffett halo effect. Perhaps they will be able to earn their way out of this – but management has not left much room for error.

($ in Billions)
Reserve For Loan Losses

2008

2009

2010
% delta
’08-’10
Bank of America $23.1 $37.2 $41.9 81.5%
Wells Fargo 21.0 24.5 23.0 9.6%
JP Morgan 23.2 31.6 32.3 39.3%
Citigroup 29.6 36.0 40.7 37.3%
Total Big Four $96.9 $129.4 $137.8 42.3%

Looking at the numbers, it’s not clear that the politicos have a point. With unemployment still at elevated levels, does it really make sense to be making new loans with reckless abandon? As a taxpayer, I prefer to avoid more years of bailouts and witch hunts for rogue banks and bankers. If 35% of the lending market is growing at 4.5%, it is likely that the other 65% is growing as fast or faster. Given that the growth is faster than that of the economy as a whole, I am comfortable that banks are doing their part.

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10 Responses to “The Truth about Bank Lending”

  1. The Analyst January 24, 2011 at 5:50 am #

    I challenge you to elaborate in later works on these:

    “If 35% of the lending market is growing at 4.5%, it is likely that the other 65% is growing as fast or faster. Given that the growth is faster than that of the economy as a whole, I am comfortable that banks are doing their part.”

  2. mr.schnider January 24, 2011 at 10:47 am #

    georgetownjack, During 2010 banks moved some “off balance sheet” assets onto their balance sheet. Your numbers showing loan growth are skewed.
    Secondly, loan loss reserves are meaningless without including the amount of losses they are suffering. For example Wells has provisioned for 6 quarters worth of losses.

    • georgetownjack January 24, 2011 at 11:15 am #

      Agreed, some loans were taken “off balance-sheet.” However, that further proves my point. The officially reported loan growth is understated. So the 4.5% I noted is really something greater. As for Wells, that is a story for another time. They claim to have written the “toxic” loans off, however, I beg to differ. You can’t have 10% market share AND have significantly better loans. The law of large numbers won’t allow it. But, that is a topic for another post (which I hope to address in the near future). Thanks for your comment.

      • Mr.Schnider February 10, 2011 at 3:10 pm #

        George, you have totally misunderstood. They brought loans from “off balance sheet” status and added them to their balance sheet. Thus OVER stating loan growth. Although quarter over quarter loan balances have grown, it is a fact that year over year loan balances have shrunk. This is all backed up by official Federal Reserve Bank statistics. Good Luck.

        • georgetownjack February 10, 2011 at 5:04 pm #

          Mr. Schnider, I did some checking on the FDIC website (http://www2.fdic.gov/SDI/main4.asp), looking at the stats, it’s clear that loan growth isn’t as robust as reported by the top banks listed here. However, total loans outstanding is higher than it was at year-end 2006 by over $100 billion. Year end data for 2010 is not yet available so the best I have to work from is 9/30/10. Even so, the loans outstanding were higher than those at year-end 2009. I would also note that loan loss reserves were almost $200 billion higher than 2006. That said, the 2006/2007 levels were not sustainable and we shouldn’t return to them given where unemployment stands today. I can tell you know what you are talking about and appreciate your comments.

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