5 Takeaways from Major Banks’ Q3 Earnings Briefings

2. How Fed Rate Cuts are Affecting Business Loan Demand (Or Not)

Analysts — and bankers — continue to wait for a surge in business loan demand in the wake of the Federal Reserve’s return to rate cuts. Across the briefings, the story was the same: It hasn’t happened yet.

"With respect to what we see in our commercial businesses, it is consistent with a lower growth economy. Line of credit usage rates remain lower than pre-pandemic levels," said Bank of America’s Brian Moynihan, chair and CEO. "This does not surprise us, with the dramatic increase in the cost of borrowing for small- and medium-sized businesses."

Moynihan added that the companies "aren’t being indolent. They want to grow. They are simply being more careful, and worry if final demand will hold. Therefore, they are being cost conscious across the board."

Some bankers blame the reticence on uncertainty over the result of the election. Some think it’s a matter of timing. But there’s also the fact that rates were low, low for years.

"Working capital was free for a bunch of years, and all of a sudden it got expensive."

— William Demchak, PNC

Demchak, chairman and CEO at PNC Financial Services Group added: "We [PNC] can come up with 10 different theories on why loan growth hasn’t been there and why it might come back, but all of them are me making up theories. … I’ve given up trying to forecast it, personally."

But Demchak also told the analysts that one reason for weak borrowing remains rooted in the Covid economy.

"People just aren’t using working capital the way they used to," said Demchak.

At Wells Fargo, Michael Santomassimo, SVP and CFO, suggested that rates haven’t been cut enough yet. He said that Wells Fargo officers talking to business clients report continued prudence about borrowers.

"The 50-basis-point reduction is helpful, but is not by itself a factor that will drive people to borrow or not," said Santomassimo.

In some cases strategic shifts hinge on the return of business credit appetite. At Truist, Bill Rogers, chairman and CEO, noted that the bank plans to build up middle-market commercial lending as demand returns. Management sees this as a major growth opportunity for the bank.

"We’ll primarily focus on industries that support existing corporate investment banking coverage and expertise, where we’ve gained significant share," said Rogers. However, in the third quarter, average commercial loans decreased by $3.2 billion — 1.7% — reflecting businesses’ state of mind.

Read more: As the Fed Trims Rates Banks Must Adjust Both Deposit and Credit Strategies

3. Office Commercial Real Estate May Get Worse Before Getting Better

Office commercial real estate lending has some time to go before it returns to anything like normal, although most major banks indicated that things had leveled off or not deteriorated much more.

"While losses in the commercial real estate office portfolio declined in the third quarter, market fundamentals remained weak, and we still expect commercial real estate office losses to be lumpy, as we continue to actively work with our clients," said Charles Scharf, president and CEO, Wells Fargo. He said further charge-offs are anticipated and that strong coverage in the loan loss allowance was being maintained. Scharf said it will take time for things to play out.

"Things aren’t getting better and it’s impacting more properties. To some extent, there is a little bit of contagion to properties that are fairly well-leased — [tenants] are looking for better deals because they think there’s weakness out there."

— Charles Scharf, Wells Fargo

Truist’s Rogers said the bank raised its loss reserve on office CRE in the third quarter to 10.4% from 9.7%. He noted, however, that nine out of 10 office CRE credits are paying according to their original terms. This reflects that about a fifth of the bank’s office CRE loans are in parts of the business where loans are smaller and use of guarantors more prevalent.

U.S. Bancorp noted that office CRE exposure had shrunk slightly in the third quarter, but that late-stage delinquencies and non-performing levels remained flat compared to the second quarter. The bank left its reserve levels at 10.8%.

Not all office CRE is alike. New buildings and renovated buildings are doing fine, said Wells’ Scharf. Older buildings are having trouble.

PNC’s William Demchak was blunter still. (The bank is maintaining reserve levels at 11.3%.)

Office buildings that drop to 50% vacancy or greater beg the question in the market whether they can get back to normal occupancy levels.

"If the answer is no, then the value of that building is next to zero," said Demchak.

Read more: How Regional Banks Like Citizens and NYCB Are Tackling CRE as Office Sector Drags

4. No Interest in Mergers, Analysts, No Matter How Often You Ask

Maybe the proposed Capital One-Discover combination keeps analysts asking large institutions about whether a merger is in their immediate future. The answer they get back is pretty universally three-fold: too hard under current circumstances, too expensive, and we’re doing well with organic growth for now, thank you very much.

Officials at U.S. Bank took questions about ambitions in the Southeast. (It has opened six retail branches in the Charlotte area since 2019.) Wells Fargo’s Mike Mayo returned to a familiar theme; Was U.S. Bank going to make a southeastern acquisition?

Mayo: Are you interested in buying a bank in the Southeast?

Andy Cecere, chairman and CEO: No.

Mayo: Not even a small bank?

Cecere: Mike, the environment right now is just not conducive. There’s too much uncertainty for M&A, and I don’t want to focus all our efforts on that when we have so much opportunity on the organic growth front….

The bank prefers these days to open more relationships digitally and via partnerships. For example, it has a program with the State Farm insurance network and, beginning in 2025, the Edward Jones Investments network. Both have name recognition and a geographic reach in areas the bank does not, according to Gunjan Kedia, president at U.S. Bank. "It’s a capital-light way of expanding into other markets," she said.

PNC’s Demchak scoffed at any talk about his bank making an acquisition, though he has gone on record in the past about the need for banks like his to somehow build scale.

"When we look at potential targets, it would be interesting in certain geographies," said Demchak. "[But] they just don’t pencil out when you look at their balance sheet and the amount of investment we’d have to put into the franchise and just the time it takes to do it."

Read more: First Horizon’s CMO Powers Through Merger Misfire with Growth Strategy

5. The Consumer is Still Spending, But Let’s Stop Talking about the Pandemic

Analyst Matt O’Connor of Deutsche Bank Securities noted that total debit and credit card spending at JPMorgan Chase was up 6% in the third quarter over the year earlier. Usage was flat from the second quarter compared to the third quarter. He asked what the bank saw in the quarter ahead.

Jeremy Barnum said what he had to say about consumer spending "is a little bit boring … it’s become normal."

"It no longer makes sense to talk about the pandemic," he said. He reflected that many people shifted to discretionary spending — the days of "revenge spending," as some people called the reaction after Covid confinement — but that spending was back to normal patterns.

"You would normally think that rotation out of discretionary into nondiscretionary would be a sign of consumers battening down the hatches and getting ready for a much worse environment," said Barnum. "But given the levels that it started from, what we see it as is actually like normalization. And inside that data, we’re not seeing weakening, for example, in retail spending."

He said everything the bank sees is consistent with the idea that consumers are on solid financial footing.

"But obviously, as we always point out, that’s one scenario and there are many other scenarios," said Barnum. (Some studies suggest many people are financially unhealthy and the bifurcation of consumers into haves and have nots has been much discussed.)

Barnum wasn’t the only one to hedge a bit.

Moynihan said BofA had seen consumer payments rise 4% to 5% year over year in the quarter, with growth continuing. This trend was consistent with the pattern of consumer spending pre-pandemic, in 2016-2019, he said, when the economy was growing and inflation was under control.

He added that he didn’t mean "to gainsay that consumers are wary of the cost of living, worried about higher rates and other matters. But overall, activity is fine."

"Based on what we see, the U.S. consumer continues to remain healthy and resilient," said Mark Mason, CFO at Citigroup. "Spending and payment rates continue to normalize, and underlying credit performance remains broadly in line with our expectations."

Interestingly, Demchak said that PNC has historically not been a big credit card player. "We have under-invested in it and we’ve under-penetrated with our existing clients," he said.

This is changing, with the launch of a new credit card and plans to expand.

"We ought to have the same penetration rate that our peers do with respect to consumer lending," said Demchak. "There’s a fairly material upside if we can pull that off — and we’re investing to be able to do so."

Read more: Consumers Eye the Impact of Possible Election Turmoil on their Money