Revisiting bank lending activity.

We have been highlighting the recent rate of change acceleration in several macroeconomic indicators and the rising probability that this could continue in coming months given the easing y/y base effects. While this is a sign of an improving economic setup, we will also be looking for a parallel acceleration in lending activity. Ultimately, credit growth is fundamental to sustained periods of economic growth and inflation.

One of the ways we track the direction of broad commercial bank lending trends is through the H.8 report from the Federal Reserve. This data breaks down the assets and liabilities of banks into a few categories: all, domestic, large domestic, small domestic, and foreign. For this post, we will focus on the asset side for all commercial banks by looking at the individual dollar amounts and the category distribution as well as the drivers of changes in growth over the last year. Drilling down further, we are mostly paying attention to the direction and rate of change in commercial bank lending.

Starting at the top, Total Assets are at 23.3 trillion, an increase of 321 billion compared to the same week last year (+1.4% y/y). Underneath that, the two largest contributors to total assets are Bank Credit and Cash Assets. Bank credit is at 17.4 trillion, down 151 billion from the same period last year (-0.9% y/y) while cash assets are at 3.59 trillion, up 469 billion in the last year (+15.0%). The takeaway here is that cash assets have been driving total asset growth on a y/y basis, not bank credit growth.

Source: Macrobond. 

Next, we can look underneath the bank credit component using a similar framework. The two major categories are 1.) Securities in Bank Credit and 2.) Loans and Leases in Bank Credit. Again, for this post we are focused on that second category.

1. The securities component stands at 5.1 trillion, down 388 billion from last year (-7.1% y/y). The subcomponents for this category are broken out into Treasury and Agency Securities at 4.08 trillion (-259 billion from last year, -6.0% y/y) and Other Securities at 1.02 trillion (-129 billion from last year, -11.3% y/y) each divided into MBS and Non-MBS.

• • Securities portfolios of commercial banks have been decelerating y/y since 2H21 and declined outright beginning in early 2022.
    • More recently, the y/y growth rate, while still negative, has been accelerating on a rate of change basis and the dollar value has started to level off.

Source: Macrobond. 

2. The loans and leases component is at 12.3 trillion, up 237 billion from last year (2.0% y/y). The major subcomponents for this category are broken out into Commercial and Industrial, Real Estate, and Consumer. There are also subcomponents for real estate and consumer categories, which we can dive into in later posts. Commercial and industrial loans are at 2.77 trillion, down 36.6 billion in the last year (-1.3%). Real estate loans are at 5.56 trillion, up 145 billion over the same period (2.7% y/y). Consumer loans are at 1.91 trillion, up 52.2 billion from last year (2.8% y/y).

• • While the above commentary highlights the latest, point-in-time level/year-over-year change/year-over-year percent change, the major takeaway can be seen in the sequential y/y decelerations across the total loans and leases category and its major subcomponents in the charts below.
    • If real economic activity were to improve meaningfully, these lending measures likely need to stop decelerating.

Source: Macrobond. 

To frame the total asset/loan growth dynamic in another way, total asset growth for all commercial banks has slowed from cycle highs of 17.8% in May 2020, 15.8% in February 2021, and 11.1% in November 2021 to 1.1% y/y growth today. In periods of positive, accelerating real economic activity, we would expect to see the loans and leases category driving total asset growth. However, over the last five months while lending activity has continued to decelerate, cash assets have been accelerating, making up a larger portion of total assets compared to last year at this time.

Source: Macrobond. 

Ultimately, a slowdown in lending activity tends to have broader implications for real economic activity. If the economic environment were to improve meaningfully, we would expect to see a reversal of the current trends in bank lending.

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.