Loan Demand Raises Worry

Loan Demand Raises Worry

The Wall Street Journal
Jan 22, 2010
By MATTHIAS RIEKER

Banks keep giving evidence that losses from bad loans will abate soon. But in a worrisome sign for the economy, demand from consumers and commercial borrowers remains tepid—offering little opportunity for growth at the banks.

"Loan growth is going to be tough" this year, BB&T Corp. Chairman and Chief Executive Kelly King told investors during a conference call, a statement echoed by SunTrust Banks Inc. Chairman and Chief Executive Jim Wells and by many other bankers this week as they reported earnings.

While bankers say they there isn't appetite for loans, borrowers say banks just aren't lending—or are setting terms for loans that are too difficult.

That trend of slow loan growth, or even shrinking loan portfolios, will likely translate into a tough—albeit most likely profitable—2010.

Losses from borrowers who cannot pay back their loans may not rise much more, and banks will need to set aside less money to offset such losses. The number of borrowers falling behind on their payments has already eased.

For lenders like SunTrust, which has struggled with losses, earnings growth will come from lower credit costs rather than loan growth.

SunTrust said its fourth-quarter interest income, the revenue from lending, fell 2% from the third quarter and 18% from a year earlier, to $1.6 billion; though profits from lending increased because SunTrust, like most banks, has to pay less interest on deposits.

The Atlanta bank set aside $974 million for current and future loan losses, 14% less than in the third quarter.

SunTrust reported a quarterly loss of $248 million, compared with a $348 million loss a year earlier. The company's loans fell 10.5%, to $114 billion.

BB&T, a stronger bank, had fewer loan losses, so its earnings will get less of a lift from falling credit costs, said Kevin Fitzsimmons, an analyst with Sandler O'Neill & Partners LP.

BB&T's profit fell 36%, to $194 million. Its interest income rose 5%, to $1.5 billion, because it bought failed Colonial Bank last fall.

BB&T's loan book rose 7%, to $109.7 billion, but without the acquisition the portfolio would have shrunk, Mr. King said. The bank's loan-loss provision rose 37% to $725 million.

"I don't feel necessarily that you need to keep building" the loan-loss provision "at this point in the cycle," Mr. King said during a conference call.

Though higher profits are of course welcome to investors, it's better to have profits from core revenue growth than from lower loan-loss provisions.

Some banks, such as Huntington Bancshares Inc., which reported a fourth-quarter loss of $370 million, compared with a $417 million loss a year earlier, might grow by buying failed banks, which requires little capital, said Tony Davis, an analyst with Stifel Nicolaus.

"We would opportunistically look at acquiring with assisted transactions," Huntington Chairman and CEO Stephen Steinour said. But "our primary focus is getting to profitability, driving the core" earnings, he said

Write to Matthias Rieker at matthias.rieker@dowjones.com

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