The $468 billion asset PNC Financial Services Group (PNC 2.24%) recently broke ranks from many of its big bank peers when it guided for average loan balances to be down this year compared to 2020. That's a big reversal from other financial institutions that have said they expect to see at least modest loan growth in the back half of the year. Loan growth would make sense, considering economists are projecting 6.5% gross domestic product growth in 2021. However, most banks saw their loan balances decline in the first quarter of the year, making some weary of what kind of loan growth to actually expect this year.
For those who don't know, PNC's CEO Bill Demchak is a great person to follow in banking. I find him to be one who will more or less "say it like it is" on earnings calls, especially when it comes to banking and industry trends. Obviously, JPMorgan Chase CEO Jamie Dimon and Bank of America CEO Brian Moynihan are still seen as the voices of the industry, but Demchak is not far behind.
On its first-quarter earnings call, PNC management said it expects average loan balances to drop roughly 3% to 4% in 2021. That's after average loan balances fell more than 2% in 2020. Total commercial loans at PNC dropped 2% from the previous quarter and are down 11% from the first quarter of 2020. Meanwhile, total consumer loans are down 3% from the previous quarter and down 9% year over year.
For businesses, Demchak said utilization on commercial lines of credit is down nearly 11% from its peak last year and roughly 5% down from historical averages. Despite the fact the economy has taken off, Demchak said there hasn't been the typical build of inventory and capital expenditures you would expect to see. He suspects the tepid loan growth has to do with hesitancy and waiting for more certainty around the pandemic. He also said that supply chains got so disrupted during the pandemic that businesses may actually not be able to build inventory right now.
As for the consumer rebound, Demchak said that it could take longer than the commercial rebound because consumers have so much built up cash from stimulus and savings during the pandemic. The problem, he said, is that people who don't normally borrow are driving the recent growth in retail sales, while the typical borrowers are flush with cash that will need to run down first before they go to take out loans.
Encouraging signs, but conjecture
Perhaps the one hint of loan growth PNC saw in the first quarter was a pick-up in line utilization in the bank's asset-based lending portfolio. Demchak said the increase was small, but encouraging nonetheless because that is the first area you would expect to see a pick-up in.
Ultimately, Demchak is not saying that the loan growth won't happen eventually. In fact, he said that loan growth "mechanically" has to happen as the economy improves and businesses are pressured to build inventory -- it's just a matter of when. He continued:
We could sit here and tell you, oh, I've watched some of these [other bank earnings] calls, 'oh the back half of the year is going to be great. Everything will be wonderful.' I hope they're right, and if they are right, we'll do really well. But I can't promise you that.
At this point, any projections on loan growth would just be "conjecture," added PNC's CFO Rob Reilly.
Hope for the best but expect the worst
Overall, I still think we could see some modest loan growth this year. Banks are conservative by nature, so the fact so many are specifically saying there is going to be some loan growth in the back half of the year means they are not just bluffing. But I also really appreciate Demchak's transparency here, especially the point he makes about not knowing when. It's already been more than three months and I haven't heard any bank say its pipelines are bulging. Consumers also have a ton of cash, so they likely don't need a loan right now.
If this were a normal economic scenario, banks would already be seeing stronger signs of loan growth. That's why I think it's important to take Demchak's comments to heart and realize that this is not a normal economy and it's hard for anyone to really predict what will happen next. Therefore, loan growth may not necessarily materialize in 2021.