This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 11, 2017).
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Since President Donald Trump's election, bankers and investors predicted that pro-business policies would lead to a surge in corporate borrowing, which would help bank profits.
Instead, the growth of loans to companies has dropped precipitously since last November -- to 2.1% from 8.1%, according to Federal Reserve data.
"Everybody thought we were about to catch a wave earlier in the year," said David Turner, chief financial officer of Regions Financial Corp., at a conference last month. "It didn't happen."
Companies have grown more reluctant to borrow after an initial surge of optimism following the election, said Jeff Glenzer, vice president at the Association for Financial Professionals, a group for corporate finance and treasury professionals. "All the turmoil and the inability to move policy through Washington set in," he said.
But analysts say the prolonged slowdown in commercial-loan growth may simply be a function of the metric returning to its normal level in recent decades. Growth in the category ran far above gross domestic product growth in the years following the financial crisis, a streak that is difficult to maintain for any prolonged period.
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The loan-growth metric will be front and center in banks' third-quarter earnings reports, which start on Thursday with J.P. Morgan Chase & Co. and Citigroup Inc.
The expected continuation of solid loan growth helped push bank stocks higher over the past year or so. The degree to which bank investors need to rethink that premise may affect whether the stocks continue to outperform.
Lending profits at the banks largely depend on the dynamic between loan growth and interest rates. While recent increases in short-term rates have made floating-rate commercial loans more lucrative, the benefit has been limited by the fact that banks aren't making many more loans.
Loan growth "has fallen short of post-election expectations," a federal advisory council of bank executives said at a September meeting, according to recently released minutes. Part of the reason loan growth has remained sluggish: a limited appetite from borrowers.
The drop in commercial lending growth has weighed on broader annual loan growth at banks, which stands at 3.2%, down from 7.3% last November.
Bankers have been predicting for months that growth would pick up. BB&T Corp. CEO Kelly King said late last year that there was "a huge pent-up demand" from commercial clients who wanted to invest in their businesses after years of holding off. "They're driving trucks with 250,000, 300,000 miles," Mr. King said.
But other industry observers say the lower growth rates are likely here to stay. Even some banks are getting less optimistic -- at least in the short-term.
"This may just be the new normal," says Credit Suisse Group AG banking analyst Susan Roth Katzke.
Analysts have trimmed earnings expectations for banks including BB&T and U.S. Bancorp since the banks signaled last month that loan growth has been softer than expected.
BB&T, for example, said in July that it expected overall loans to be up 1% to 3% in the third quarter compared with the second quarter. In mid-September, the bank walked that back, saying it expected loan growth to be slightly down in that period.
But BB&T executives are hopeful of a ramp-up in business borrowing in the longer run, in particular if a U.S. tax overhaul happens. Small and medium-size businesses, Mr. King says, are still "much more confident, much more optimistic."
The loan-growth slowdown is noteworthy because it is occurring when many metrics show the U.S. economy strengthening. Unemployment is low, broader stock-market indexes have reached records and metrics of small-business confidence are up.
BB&T, like a number of its peers, said last month that loan customers recently shifted to borrowing from the bond market to take advantage of low rates there. Bond issuance by nonfinancial firms in the U.S. is up 6% so far this year, according to data provider Dealogic.
But rates have ticked up recently making it more expensive to borrow in some cases. Some firms took advantage of low rates by borrowing in prior years, so they may not need to jump into the lending market anytime soon.
Thomas Deas, chairman of the National Association of Corporate Treasurers, doesn't expect companies to binge on debt if the current economic recovery continues at its relatively slow pace, noting that many companies have borrowed what they need for the current environment. "They already did the borrowing when rates were lower," Mr. Deas said.
Others say the prolonged slowdown in commercial-loan growth may simply be a function of the metric returning to its normal level in recent decades.
Since 1973, commercial loan-growth has been closely correlated to gross-domestic-product expansion, according to Credit Suisse's Ms. Katzke. The recent slowdown is likely a function of the metric returning to its historic relationship with GDP, she said.
Jack Micenko, an analyst with Susquehanna Financial Group, looked at capital-expenditure data as a share of GDP after World War II and found that its current level is about normal at around 16%. That casts doubt on the idea held by some bankers that companies have broadly held off on investing.
"Are there some owners driving trucks with hundreds of thousands of miles on them? Sure," says Mr. Micenko. "But I'm not sure how substantial that is compared to the market broadly."
(END) Dow Jones Newswires
October 11, 2017 02:47 ET (06:47 GMT)