Persistently sluggish lending is likely to be a drag on US banks' revenue when the sector reports financial results for the second quarter.

Despite funding cost pressure subsiding as underlying short-term interest rates remained stable for more than three quarters, weekly Federal Reserve data showed that deposits were flat during the second quarter. Meanwhile, seasonally adjusted loans across domestically chartered US banks increased 0.5% from March 27 through June 26, according to the Fed data, and were up 1.0% without seasonal adjustment.

Credit card lending, which is highly concentrated among a relatively small group of banks but has been an engine of industrywide loan growth after a slump during the pandemic, downshifted in the second quarter, with bank executives observing a slowdown in consumer spending. Credit card loans were up 0.1% from March 27 through June 26 after seasonal adjustment, and up 2.1% without seasonal adjustment.

With loan growth scant and deposits flat, seasonally adjusted total assets were up 0.8% from March 27 to $20.315 trillion at June 26. Without seasonal adjustment, assets were down 0.2% over the period, including declines in cash and securities.

Modest expectations

The data is consonant with subdued guidance from executives at banks including Bank of America Corp., Wells Fargo & Co., PNC Financial Services Group Inc. and Truist Financial Corp. during the second quarter, who have cited factors such as weak demand as borrowers wait for lower rates and emphasized the need to stay cautious on underwriting after an increase in credit loss rates.

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"Loan growth should remain tepid due to the absolute level of rates, a more selective appetite, and increased regulatory scrutiny around [commercial real estate] concentrations," Piper Sandler analysts wrote in a June 24 note. "An inverted curve also makes it more difficult for the banks to book new credits at reasonable risk-adjusted spreads given the incremental cost of funding."

BofA Global Research analysts expect that trend to continue at least through the end of the year "as customers wait for macro clarity (particularly on rates)," they wrote in a July 9 note.

Steady deposits

Seasonally adjusted deposits were about flat across the period at $16.287 trillion as of June 26, and down 1.1% without seasonal adjustment, though that was enough to maintain year-over-year growth of 1.6%. Year-over-year growth resumed in March, according to the weekly Fed data.

Persistent rotation into higher cost accounts was still apparent in a 4.6% seasonally adjusted increase in large time deposits to $1.599 trillion. The move into large time deposits has eased however, with year-over-year growth rates that neared 100% in late 2023 moderating to 35.6% at June 26.

"We expect a more typical seasonal decline in deposit flows in April before recapturing balances, and then some growth potentially, in the months of May and June," the Piper Sandler analysts wrote. "The unfavorable mix change should lessen in [the second quarter]. We believe bank balance sheets are somewhat bloated from an increased reliance on borrowings and brokered [certificates of deposit] in recent quarters to help plug deposit run-off and shore up liquidity, so we would not be surprised to see some incremental unwind of this higher cost funding in [the second quarter] and throughout the rest of the year."