Shifting Bank Loan Composition
After the recent financial crisis, there has been a huge shift in bank’s attitudes to towards lending to consumers. Since then, banks have shifted their assets away from consumer loans and towards corporate loans. Commercial and industrial loans in 2015 Q1 grew at 8.5% and accounts for 21% of U.S. bank’s outstanding loan book, which is at a 13 year high. This growth compares to mortgage growth of only 1.7%.
This shift towards commercial and industrial loan growth reflects 2 trends building upon each other. The first is an increase in demand from businesses as they try to lock in lower rates in the wake of a Fed Funds Rate hike. The other trend is based off of banks’ negative attitude towards mortgages.
Currently American bank’s hold $8.362trn on their balance sheet, which is a 5.4% increase this year amounting to $1.749trn. On the real estate side, residential mortgages rose by $1.855trn. Loans to real-estate construction grew by 15% while products to consumers fell 3.6%. Many banks such as Bank of America have expressed their intentions to not replace maturing home-equity loans. This dramatic contrast between the loans to commercial clients and consumers shows a clear image of where capital is flowing to.
This shift in loan book composition has a tremendous impact going forward. The first comes from banks’ profitability. As banks prepare for a rate hike in the near future, banks with a higher proportion of corporate loans are able to benefit more in a rate hiking environment compared to retail banks. This is because corporate loans tend to have a shorter duration than consumer loans which are usually locked up in 30 year fixed rate mortgages. The second impact is on the consumer side. As supply declines, financing for home purchases becomes harder. At the same time, loans for home construction is increasing. This creates an interesting dynamic between supply and demand. As supply increases, the prices of homes will decreases and as financing becomes more difficult to obtain, demand for home purchases declines as well. It will be interesting to see where the equilibrium is and how the housing market will behave moving forward.
Evan Wang B.S. in Finance and Statistics Leonard N. Stern School of Business New York University Class of 2017 Email: email@example.com firstname.lastname@example.org Cell: (805).300.2755