By Telis Demos
U.S. banks are no longer living in the shadow of the 2023 crisis sparked by the collapse of regional lenders Silicon Valley Bank, Signature Bank, and later First Republic. But recent reports offer a glimpse of what could haunt them next: a long, slow grind.
In particular, continued slow loan growth is becoming a drag on regional banks, which have less exposure to the booming Wall Street trading and investment-banking business that is benefiting some of the very biggest megabanks.
By all rights, the mood for banks ought to be upbeat. Worries about big deposit outflows are behind them. Based on history, the trifecta of steady-to-falling interest rates, an administration with a deregulatory agenda coming into office and sub-3% inflation ought to be a recipe for fast lending growth.
Investors are salivating, too, bidding up bank stocks since the November election, and rotating even further into the sector following the recent AI-led correction in tech stocks. The KBW Nasdaq indexes of both large and regional banks are both solidly outperforming the market so far in 2025, up around 10% and 6%, respectively, compared with about 3% for the S&P 500.
Yet in their recent round of quarterly updates, many banks continued to give only tepid outlooks for a key part of their business: lending money. PNC Financial Services said, for example, that there was no loan growth in its first-quarter of 2025 net interest income projection.
"We've kind of gotten tired of trying to pick that point in time where things go up, and just be conservative about it," PNC Chief Executive William Demchak told analysts in mid-January.
A number of bankers said they hoped to see growth later this year, citing optimism among clients and other indicators. Demchak noted that PNC was growing clients, but clients were also using less of their available credit lines. Perhaps if the currently hazy outlook for tariffs, taxes and the federal budget clears up, more companies will feel better about taking on debt and making investments.
But if that growth doesn't materialize, investors will have to wrestle with some thorny questions. Is there some underlying weakness in the business economy that the macroeconomic data masks? Or is the financial system evolving away from bank loans? Neither prospect is comforting for lenders.
In the short term, some key revenue measures can still grow in 2025, in particular via the maturing of old, low-yielding government bonds, the same ones that helped spark the 2023 panic. However as those maturities slow, and if reinvestment yields fall with future Federal Reserve rate cuts, then growing the volume of higher-yielding lending becomes a big key to revenue growth further out.
Across U.S. commercial banks, loans grew about 2.7% from the end of 2023 to the end of 2024, according to Federal Reserve data, only slightly faster than the prior year's 2.3% rise. Loan growth hasn't been this slow since the aftermath of the 2008 global financial crisis.
In fact, 2024's combination of falling interest rates, rising hopes for deregulation and slowing inflation probably should have translated into a lending bump. This is especially the case for lending that is usually highly cyclical and correlated to the economy, such as commercial and industrial lending. But in 2024, banks' so-called C&I loans by year-end grew by just 1% from 2023.
"When you look back at periods that tick even one of those boxes, let alone all three, business loans are growing well into the double digits, " says Brian Foran, regional banking analyst at Truist Financial. "Even just expecting 5% or 6% growth, much less growth that rounds to zero, is underwhelming to history."
Sometimes bigger banks do better than banks overall. But it is a challenge for banks of all sizes right now. Loan growth at the end of the fourth quarter in 2024 from a year earlier was under 2% on average across 34 large global, national and regional U.S. banks recently reporting earnings, according to a tally by Morgan Stanley analysts. A dozen of those banks even saw loan declines, including Wells Fargo, PNC, Citizens Financial, KeyCorp, Regions Financial and Comerica.
One headwind facing many regional lenders are declines in commercial real estate mortgages. So-called CRE has long been a strength for many midsize banks, while other lending categories have become more concentrated. For example, many credit-card loans go either through global megabanks, such as JPMorgan Chase or Citigroup, or specialist card lenders such as Capital One Financial or Synchrony Financial.
But many banks have recently been working to shrink their exposure to commercial mortgages, in light of challenges faced by offices, retailers and other property owners. And when maturing mortgages come up for renewal, banks have also often asked for a lot more money down, which can shrink the size of the renewed loans.
Commercial real-estate loans at banks grew overall just 1.3% in 2024, according to Fed data, which was the slowest pace in over a decade. Reducing credit risk can come at the expense of loan growth.
Even the biggest megabanks aren't immune to lending malaise. JPMorgan Chase reported a fourth-quarter decline in commercial-banking loans, which span middle-market company loans and commercial real estate.
But JPMorgan and its Wall Street peers have something to make up for that: armies of investment bankers and traders. These teams earn fees advising lending clients on mergers, or helping them hedge their market risks. And they are also doing an increasing amount of lending to nonbanks, like private credit alternative asset managers, who then use those funds to make their own loans.
Many Wall Street-arranged loans are ones banks wouldn't want anyway, since they often leave the borrower highly leveraged. But as more companies borrow in that fashion, this has left banks in stasis. As of the middle of last year, the share of corporate debt that is in the form of a nonmortgage bank loan was around 9%, according to Fed data. That is in the range of where it has been over the past decade, but still well below the 20%-plus share typical in the 1990s.
Holding steady isn't the same thing as growing. For banks that rely on lending, something may have to change.
Write to Telis Demos at Telis.Demos@wsj.com
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