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Will Loan Growth Accelerate In 2013?

 December 17, 2012 03:16 PM

(By Mani) Many are wondering when/if loan growth will accelerate in 2013. The concerns assume significance as banks need loans to boost their income. However, lower interest rates on loans hurt banks' net interest margin, a key source of profit indicator for the banks.

Based on Fed data, period end loans are up 1.6 percent from last year. Private sector deleveraging continues with household debt/equity at 20 percent at Sept.30 versus 21.5 percent at year-end 2011 and a peak of 26 percent in 2008. This compares to a 25-year average of 18 percent, which levels seem likely to approach by the end of 2013.

"We think a ramp up of growth in late 2013/2014 is possible, but it's difficult to have much conviction in this right now," Deutsche Bank analyst Matt O'Connor said in a client note.

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Debt/personal income (1.0x) has been steadily trending down compared to a 1.15x peak in 2007 and is now slightly above the 25-year average of 0.9x. Given such low interest rates, one could argue a higher than historical leverage ratio is justified while others would argue leverage may dip below historical levels due to ongoing macro uncertainties and tight credit in several areas.

"Our view is de-leveraging will continue for at least a few more quarters but could be done by late 2013," the analyst noted.

Meanwhile, US bank share of credit has been steady of late. While banks originate a majority of credit in the US, just 29 percent resides on US bank balance sheets as loans. Banks share of the credit market is relatively unchanged since the start of the year, but down slightly from 30 percent at year-end 2007 and 47 percent 25 years ago.

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The lack of a more meaningful share of credit on balance sheets mostly reflects the large role the government plays in backing mortgages and the deep bond market.

Currently, 9 out of 10 of new mortgages are backed by the US government backed institutions such as Fannie Mae and Freddie Mac. However, banks may begin to portfolio more mortgages in 2013 and beyond. This reflects the lack of other loan growth opportunities, ultra-low yields on lower risk securities, wide spreads on new mortgages and increasing GSE guarantee fees.

"While 30yr fixed rate mortgages add potential outsized rate risk, we wouldn't be surprised if the combination of longer dated agency mortgage-backed securities and mortgage loans increased to 15-20% of bank balance sheets vs. 5-10% currently," O'Connor said.

Meanwhile, loan pricing likely to compress before banks loosen underwriting standards as they are aggressively promoting new loans due to excess capital/liquidity levels at banks and low yields on securities. To do this, banks could loosen credit standards and/or lower loan spreads.

"Given macro uncertainties are likely to persist and loan spreads are currently wide, we expect pricing to come in before banks loosen credit," O'Connor wrote.

This suggests that the 2-3 basis points of net interest margin pressure per quarter that most banks expect for the foreseeable future could prove optimistic. However, in late 2013/2014, if macro conditions continue to improve, banks will begin to loosen underwriting standards.
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