Macro Trends To Support Greater Lending

BMI View: We expect US commercial banking sector client loan growth to accelerate in 2014, as stronger real GDP growth buoys consumer confidence and businesses increase investment to meet rising demand. Amidst a backdrop of rising interest rates and a reduction in quantitative easing, we believe banks will begin to shift their historically large cash assets into lending.

The US commercial banking sector remains broadly stable, and we expect lending portfolios to strengthen throughout 2014 on the back of falling delinquency and foreclosure rates, reflecting our view that the US economy is set to accelerate to 2.8% real GDP growth from 1.8% in 2013. We expect continued asset growth in the coming years, but note that this growth will be increasingly driven by growing private sector demand for credit in 2014 and 2015, rather than quantitative easing from the Federal Reserve (Fed), which has already begun slowing the pace of its asset purchases.

Asset Growth To Slow Over Multi-Year Period

Asset Expansion To Accelerate On Stronger Real GDP Growth
US - Total Assets & Client Loans, % chg y-o-y (3-Month MA)

Macro Trends To Support Greater Lending

BMI View: We expect US commercial banking sector client loan growth to accelerate in 2014, as stronger real GDP growth buoys consumer confidence and businesses increase investment to meet rising demand. Amidst a backdrop of rising interest rates and a reduction in quantitative easing, we believe banks will begin to shift their historically large cash assets into lending.

The US commercial banking sector remains broadly stable, and we expect lending portfolios to strengthen throughout 2014 on the back of falling delinquency and foreclosure rates, reflecting our view that the US economy is set to accelerate to 2.8% real GDP growth from 1.8% in 2013. We expect continued asset growth in the coming years, but note that this growth will be increasingly driven by growing private sector demand for credit in 2014 and 2015, rather than quantitative easing from the Federal Reserve (Fed), which has already begun slowing the pace of its asset purchases.

Asset Growth To Slow Over Multi-Year Period

Total commercial banking sector assets grew by 6.7% in 2013, slightly slower than our estimate of 8.0%, but still the fastest year of expansion in the sector since the start of the 2008-2009 financial crisis. We believe the pick-up will continue in 2014 and forecast 7.0% asset growth. After that, however, we expect that lower trend real GDP growth will be matched by a slower rate of expansion in the commercial banking sector. The sector expanded by an average of 7.7% from 1991 to 2008, but we forecast just 5.3% growth from 2015-2018, the end of our five-year forecast period.

Asset Expansion To Accelerate On Stronger Real GDP Growth
US - Total Assets & Client Loans, % chg y-o-y (3-Month MA)

We forecast that client loans, which accounted for 72.3% of total assets in 2013, are set to expand by 7.5% in 2014, building on base effects from weak growth of just 1.2% in 2013. Consumer confidence is back near post-recession highs, and the unemployment rate is falling quickly, both of which suggest stronger demand for credit this year.

We maintain our view that stronger economic growth will allow the Fed to end QE3 this year ( see 'QE3 To End In 2014 As Economy Strengthens' January 10), and that this transition will lead to lower rates of growth in bank holdings of cash assets. Whereas cash asset growth accounted for the bulk of the increase in total commercial bank assets in 2013, a reduction in Fed asset purchasing will slow and eventually halt this dynamic. Furthermore, as interest rates rise in the US, we believe commercial banks will be forced to earn greater returns on their assets than in recent years, creating an incentive to shift their asset mixture toward lending.

Cash Asset Growth To Slow As Lending Increases
US - Contribution Of Cash & All Other Assets To Total Asset Growth, pp (LHS) & Cash Assets, % of Total Assets (RHS)

Based on historical ratios of loans to assets and deposits, we believe the commercial banking sector can comfortably extend credit at a greater rate in 2014 without becoming over-extended. Indeed, as government support for the banking sector and successive rounds of quantitative easing have pushed cash assets on bank balance sheets to long-term highs, loans as a percentage of assets and deposits have fallen to 72.3% and 102.7%, respectively, down from an average of 81.3% and 124.4% since 1990. As such, banks could afford to see a period of credit expansion outpacing both total assets and deposits without fundamentally threatening the stability of the sector.

Lending Ratios Will Head Higher
US - Loan-To-Asset & Loan-To-Deposit Ratios

Complementing what we believe is a high capacity to extend credit on the part of banks, an increasingly creditworthy US private sector will demand more loans over 2014. At 3.1% in Q313, the mortgage foreclosure rate continues to fall after hitting 4.6% in Q410, and the delinquency rate for all consumer loans is 2.4%, near long-term lows. These trends will be reinforced - and consumer demand for credit will increase - as the labour market continues to tighten over the course of this year, increasing consumer confidence and appetite for loans.

Households Increasingly Creditworthy
US - Foreclosure & Loan Delinquency Rates, %

The picture is more mixed for the corporate sector, with outstanding debt to equity at 47.2%, slightly above long-term average of 43.7% since 1980. That said, we expect greater consumer demand in 2014 to provide strong incentives for additional investment by the private sector, at least some of which will be financed through an increase in bank lending.

Slightly Above Long-Term Averages
US - Corporate Sector Debt Outstanding, US$bn (LHS) & % of Net Worth (RHS)

Deposit Growth To Accelerate In Line With Economic Strength

Deposit growth in 2013 came in at 5.8%, below our estimate of 7.0% and the long-term average of 6.5% annual growth from 1991 to 2008. While we expect stronger economic growth will buoy deposit growth, forecasting 7.0% in 2014, we acknowledge that lower trending real GDP growth will see slower expansion in banking sector deposits, similar to our long-term view on asset growth. We forecast deposits will expand by an average of 5.0% from 2015-2018.

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