US Banks:Despite stronger expectations,loan growth continues to decelerate
Softer loan growth could offset some of the tailwinds to bank earnings power
Expectations for better economic growth and increased loan demand is a key factordriving the improved outlook for bank earnings power since the election, but thisimproved sentiment needs to be balanced against the recent deceleration in loangrowth trends in the Fed's H.8 data. Overall Y/Y loan growth has now fallen to 5.1%,the lowest level since 2014, and while banks have indicated healthy conversations withcommercial customers (especially small business clients), they do not expect to seemeaningful improvement in actual lending activity until 2H17. Therefore, we believe itis increasingly important to see the enthusiasm around stronger economic growth turninto tangible improvements in lending as we progress towards the middle of the year.
Deceleration in C&I growth has been especially sharp
We see the drop in C&I lending as most concerning, with Y/Y growth rates now at 6%,near the lowest level since 2011. While C&I growth has been a primary driver of overallloan growth in recent years, we have been concerned about the outlook for some timedue to slowing capex trends as well as tightening lending standards in the Senior LoanOfficer Survey throughout much of 2016. While CRE growth has also slowed slightly, itremains healthy at over 9% Y/Y, and on a QTD basis, C&I loans are down slightly whileCRE loans are up just under 1%.
Consumer growth trends also slowing a bit
Consumer loan growth continues to lag commercial growth, with total consumer loansup 4.4% Y/Y. Growth continues to be stronger for card, auto, and other consumerloans compared to mortgages, although growth for each of these categories hasdecelerated slightly in recent months.
Slowing loan growth trends reinforce our cautious outlook on banks
We see current bank valuations pricing in an upside scenario for earnings growth,reflecting catalysts such as corporate tax reform, higher interest rates, and strongergrowth in loans and NII. Specifically, many of the banks in our coverage group currentlytrade at historic average forward P/E multiples on our upside case 2018 earningsexpectations, which we see as providing limited upside for many of the stocks.