Between personal bank accounts filled with stimulus dollars and relief programs strengthening corporate balance sheets, loan growth has been lackluster for financial institutions over the past year.
But bank executives say that could change – and sooner than expected.
Banks are already posting record profits in the first quarter of this year, coinciding with the environment of recession that was expected to weigh on the economy which did not fully materialize. At the same time, the demand for loans that banks are seeing – which often goes hand in hand with a growing economy – appears to be heading for a recovery.
At one of the state’s largest lenders, Bank of America, there are already signs of a rebound, said Alberto Garofalo, president of the organization’s New Jersey market.
“We’re seeing record levels of engagement with clients wanting to talk to us (on loans and other opportunities),” he said. “And if you look at the most recent trends, in March consumer spending is up, and that’s obviously a leading economic indicator.”
That interest and activity has not quite returned to what it was before the pandemic, Garofalo admits.
“But, when you take everything into account, we’re optimistic that there are clear indications that the best is hopefully yet to come,” he said.
In the latter part of the year, companies may be forced to seek other sources of liquidity – spurring new demand for banking services – once there is nothing left to find in the current stock of funding provided by the government.
Bank of America has leveraged its global resources and capabilities to deliver more than 22,000 Paycheck Protection Program loans from all of its iterations and phases, for a total of more than $ 1.8 billion.
Banks involved in the program, which was established by the CARES Act last year to provide small businesses with potentially fully repayable loans, have distributed more than 250,000 loans in total, worth around $ 25 billion, in the New Jersey.
“It’s still a staggering number,” said John McWeeney Jr., CEO and President of the New Jersey Bankers Association. “But it’s starting to calm down. With the last round of funding, which was supposed to last until June, I hear estimates that it could run out by the end of April. “
After a $ 1.9 trillion US bailout extension, nearly $ 292 billion has been made available under the ongoing PPP process. But the Small Business Administration recently warned that only $ 66 billion of that treasure remained.
As this funding is no longer available to businesses and the vaccination campaign allows more sectors of the economy to reopen, there is potential for renewed interest in conventional bank loans.
McWeeney heard the hypothesis. He is not entirely convinced.
“I think some banks will see this new demand for loans, but there are reasons why it may not be a big increase, including the fact that many customers are already quite cash-rich and are already in cash. good position, ”he said. “Basically, they don’t really need to borrow where they are.”
McWeeney knows, according to members of his banking association, that deposits are strong – really strong. In part, that’s because people and businesses have cashed checks for coronavirus relief and have remained relatively conservative about that money.
Joseph Lebel III, president and chief operating officer of OceanFirst Bank, said cautious behavior driven by the uncertainty of the pandemic had significantly slowed lending last year.
But in the first quarter of this year, the bank hit all-time highs in lending.
“There is pent-up demand from customers who think we are going in the right direction,” he said. “It’s good to see.”
In the banking sector, things are moving towards – he dares to use the word – normality. Lebel said one of the easiest ways to see this is with forbearance loans for businesses damaged by the pandemic which have been resolved. About 97% of their customers have reverted to normal payment plans.
Rebuilding the sense of community
After a year of appalling worst-case assumptions inspired by the global health crisis, bank executive Patrick Ryan is approaching 2021 with a healthy dose of optimism.
In fact, the CEO and chairman of First Bank said he was more optimistic about the outlook for the banking industry today than in recent years. When the economy is doing well, the banks usually do too. And, during the recovery period from the uncontrolled spread of COVID-19, Ryan said, it appears the economy is doing well.
However, he added that there remains a key question for community banks before he can say things are shaping up perfectly for them as well.
“How can we get people back online safely?” he said. “Many banks live off some relationship capital that we have accumulated over many years. Over time, this capital runs out. “
Smaller community banking institutions have always prided themselves on the close relationships they forge with local residents and businesses.
“And, if a client doesn’t feel like they have a strong relationship with us, it’s a lot more likely, I think, to go with the big banks,” Ryan said. “That’s why it’s so important to figure out how to re-engage people and reconnect.”
The chances of this happening in branch offices could be reduced in a post-pandemic environment. As bank branch traffic has dropped precipitously, many banks have decided to reduce the number of physical locations they maintain – after years already of doing so at a steady pace.
Hamilton-based First Bank is part of this trend. Earlier this year, the institution consolidated its Mercerville and Hamilton Square branches into other nearby locations.
Ryan said it’s no secret that a bank’s relationship with its customers involves more of a digital touch.
“So I don’t think we’ll go back to doing things like we did before,” he said. “It will take a different balance of investment and awareness than in the past.”
As McWeeney confirmed, most banks have seen companies that have accepted loan deferrals start repaying their loans as usual. As a result, loan loss reserves have been recalibrated, with banks that set aside funds for rainy days feeling they may have been over-prepared – helping to boost bank profits in the first quarter. .
“There are still people waiting to find a light at the end of the tunnel, but we are seeing a lot of momentum and positive energy in the market from customers,” said Lebel. “We expect that for those waiting on the sidelines – restaurants, hospitality and travel in particular – summer could spark renewed consumer demand.”
The uneven path of economic recovery that different industries are expected to follow has weighed on the outlook more than a slow rebound in loan demand this year.
To that end, Lebel said something like the American Rescue Plan’s $ 28.6 billion Restaurant Revitalization Fund, a grant of up to $ 10 million available to restaurants and other food companies that have experienced a decline in sales, will provide a necessary lifeline for these businesses.
“I believe a fund like this will make a difference for many,” said Lebel. “And those companies that would benefit are our long-standing customers, with whom we have a good relationship. We understand that what happened to them is not necessarily their fault. “
During the first three weeks after grant applications are submitted on April 30, the SBA gives priority to businesses owned by women, veterans, or those who are socially and economically disadvantaged.
It goes to another point that Garofalo hopes doesn’t get lost in the lending talks: not enough money is going to communities of color and underrepresented entrepreneurs.
Bank of America recently expanded its own racial justice initiative, dedicating $ 1.25 billion to the cause – with $ 188 million in investments already distributed to fill the gap in access to growth capital for companies led by minorities
“Frankly, we are leading the way with this and we hope, through this leadership, that others will join us,” he said. “These commitments have never been so strong and firm.”