There's a new trend in banking: shrinkage.
Gross loans at JPMorgan Chase
All told, total loans at these four banks -- which dominate the nation's banking industry -- fell $186 billion over the past year. That's $620 per U.S. citizen, and more money than was injected in the 2008 Bush stimulus package. Big stuff, folks.
What's going on, and why should you care?
The loan bust highlights why the economy is slow to recover: We're deleveraging. Household debt payments as a percentage of income have fallen to the lowest level since the early 1990s. Some debt is being paid down. Even more is being written off by banks. It's falling, and falling fast. Growth of the early 2000s came from leverage. The lethargy of today comes from deleveraging. History, you know ... one damned thing after another.
This isn't entirely bad news for banks. Yes, banks make money from loans. Fewer loans equal less profit. I've written that this could explain why banks trade at low valuations. But one counter is that profitability won't be dinged much because banks are only shedding their lowest-quality assets. At Wells Fargo, what the bank considers "core" loans actually increased over the past year. The overall decline was driven by its "nonstrategic" portfolio, made up of a motley mess of loans acquired through acquisition. Citigroup's story is similar: Its loan decline is linked to an internal unit called Citi Holdings, which houses a quarantined pool of trashed assets the bank is eager to put out to pasture. Among all banks, loan declines have been driven by the consumer side -- still hobbled by 9% unemployment. Commercial loans have been flat, even growing, in recent months, though industrywide commercial loans are still 20% below 2008's peak.
In any case, a decline is a decline. A question just as relevant to the economy as it is to bank investors is, when is this going to turn around? When will deleveraging stop and overall loan books rise again?
It will happen. But the return could be slower than some think.
On the consumer side, most smart economists say unemployment should stay high for another year or two, minimum. That should keep the deleveraging-and-defaulting parade in high gear. Ditto for real estate, keeping demand for mortgages at bay. Thirty percent of home sales are now all cash, far above historic levels. Many of those who do have a taste for real estate don't need a mortgage. Not the best news for banks.
On the corporate side, a big uptick in loan demand might remain elusive even after business picks up. Money manager Andrew Smithers made an important point in the Financial Times this week: Corporations have near-record amounts of both cash and -- importantly -- debt. Smithers' argument was that such figures could fuel another financial crisis. But even absent a crisis, they give hints about future loan demand. Corporations have enough cash to expand substantially without borrowing more. And they don't, for the most part, have room to take on more debt.
Part of this is because companies spent recent years prefunding future cash needs by tapping the market's insatiable thirst for bonds, then sitting idly on the cash proceeds. Both Microsoft
Things will get better. Loans will grow again. But like so much else, the phrase "the future will look nothing like the past" rings true. Banks relied on loan growth to drive earnings for the last decade. What will drive the next? It's a good question investors should ask.
Fool contributor Morgan Housel owns B of A preferred and Microsoft. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of JPMorgan Chase, Google, and Microsoft. The Fool owns shares of and has opened a short position on Bank of America. The Fool owns shares of and has created a ratio put spread position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of Google and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.