Preliminary second-quarter data from the Federal Reserve indicate the year-over-year growth rate of business loans rose to 5.5% in late June from less than 1% near the end of 2017. The upturn marks the reversal of a prolonged slump in business-loan growth that began in earnest about two years ago.
For banks, the acceleration in lending may help lift results when firms report quarterly results this month. “We’ve been waiting for this ever since the 2016 election,” said Scott Siefers, a bank analyst at Sandler O’Neill + Partners.
A slowdown in businesses’ appetite for bank loans began to gather pace in summer 2016, a few months before the 2016 presidential election. Lending growth, which had exceeded 10% for much of the prior two years, dipped into single digits.
Most bankers expected that optimism among business owners in the wake of President Donald Trump’s surprise victory would lead to increased borrowing. Instead, loan growth continued to fall, reaching a rate of around 0.5% in December 2017.
The fall-off dampened bank profits. Just as troubling for bankers: Broader economic data was solid and there weren’t obvious reasons for the decline. Some bankers attributed it to competition from nonbank lenders or a lack of confidence at companies due to political upheaval.
The exact reason demand for business loans has risen is tough to pinpoint. Many analysts point to metrics that show businesses have a rosier economic outlook. Some bankers think midsize clients are laying plans to expand, including through acquisitions, and are drawing on lines of credit to fund those endeavors, according to a federal advisory council of bank executives.
Business loans are growing faster at small and midsize banks than they are at the biggest U.S. lenders, according to Fed data. These smaller lenders tend to focus on businesses outside of the largest corporate firms.
Stronger business-loan growth is helping lift broader lending growth. Overall loan growth at banks increased to a 5% year-over-year growth rate in late June from 3.9% at the start of 2018, according to Fed data. Growth in some other categories of lending, such as for commercial real-estate projects like apartment buildings, by contrast, is slowing.