At Last! Banks Rev Up Lending

By Victoria McGrane | The Wall Street Journal

U.S. banks posted their biggest quarterly increase in lending in four years, offering reason for optimism that the economic rebound is picking up steam.

The lending expansion—detailed in the industry’s latest report card from a top regulator—is good news for the U.S. economy at a time when the unemployment rate is 8.3% and investors remain anxious about the prospect of an economic downturn or market shock spurred by Europe’s debt crisis. Increased credit availability stands to help U.S. businesses that have been looking to finance new growth.

The lending pickup is a bright spot in a period of intense questioning about banks’ earnings power. U.S. financial firms have been under pressure in the markets as weak economic growth, tighter regulation and a decline in trading and deal making crimp their earnings outlooks.

The report, released Tuesday by the Federal Deposit Insurance Corp., also showed that the banking industry posted a $119 billion profit for 2011. That’s up 40% from a year earlier and the banks’ biggest profit since 2006, when the housing boom was in full swing.

The profit surge came as loan losses fell to their lowest level since early 2008, in the latest sign that the industry is healing from the bad lending decisions that laid it low during the financial crisis.

“The real key going forward is going to have to be a pickup in lending,” FDIC Chairman Martin Gruenberg said at a press conference. “That’s why we took some encouragement from the recent growth in loan balances.”

But in a sign of the tough choices facing banks, the industry’s annual revenue dropped for the first time since 2008 and only the second time in 74 years. Low interest rates, several years of anemic loan demand and new limits on fees that lenders can levy on their customers have eaten into the top line, leaving bankers searching for new ways to generate income without angering clients.

The fact that earnings are being driven by banks putting aside less cash to cover bad loans rather than traditional activities of making loans and collecting interest also raised eyebrows, because the trend “can’t go on indefinitely,” said Mr. Gruenberg.

Strong lending growth, as long as the loans are of high quality, should boost earnings in coming years. That would be a bit of good news for bank stocks, which have been rising this year after a walloping last year. The KBW index of regional bank stocks is up 16% this year to a recent 45.56, but the index has retraced less than half of its 2011 decline.

SunTrust Banks Inc., Atlanta, saw loan demand pick up over the course of 2011, particularly in the second half of the year. Much of the growth came from large commercial clients, said Kris Dickson, director of investor relations. “The demand increase and balance growth that we saw really came from the large corporate segment. There’s still not a whole lot of activity down in the small-business end,” he said. In total, SunTrust’s loan portfolio increased by $5.5 billion, or about 5%, over the course of 2011. Roughly half of that growth came from commercial loans.

Banks reported loan balances grew by $130 billion, or 1.8%, in the last three months of 2011 from the previous quarter, the biggest increase since the fourth quarter of 2007. The fourth-quarter growth was driven by loans to commercial and industrial customers, the FDIC said. Lending to these borrowers increased $62.8 billion, or 4.9%. Small commercial and industrial loans—those totaling $1 million or less —also grew for the first time since the agency began collecting information on these loans in 2010. “We’re hopeful that’s going to continue to increase and will actually expand to other kinds of credit,” said Mr. Gruenberg.

That loan growth helped slow the decline in industry revenue lurking beneath the strong profit numbers. Banks’ annual revenue dropped $34.9 billion, or 4.5%, from 2010, the result of low interest rates and slack loan demand, Mr. Gruenberg said. It is only the second time since 1938 that annual revenue has fallen.

On the small-business front, in the third quarter, Pankaj Mohan received a $1 million loan guaranteed by the Small Business Administration from Hopewell Valley Community Bank in New Jersey, which he used to buy equipment and build a state-of-the-art facility for his biopharmaceutical start-up, Oncobiologics. The company, which is developing cancer treatments, employs about 35 people and will likely grow to 60 or 80 by the end of the year. It weathered a series of rejections from banks at the start of the year.

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Virginia MacKoul

Virginia is a graduate from the University of Florida's College of Design Construction and Planning with a degree in Sustainability and the Built Environment, and a minor in Urban Regional Planning. Virginia joined the Front Street team in 2011, as an intern. Upon graduation, Virginia joined the Front Street team full-time as the Director of Client Services. Ms. MacKoul’s addition furthers Front Street’s continued growth and expansion within Gainesville and other North Central Florida markets. She was promoted to Director of Marketing in 2014 and now manages the firm’s team of interns and oversees all marketing and branding activity. Virginia was born in Boston and moved to Lee County, Florida in 1997. Virginia graduated her high school's International Baccalaureate program and started at the University of Florida with a focus on Architecture. Virginia shares Front Street's passion of giving back to the community and those in need. Virginia's hobbies include photography, cooking, football, movies, music, and spending time with her dog, Brinkley.

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