18 January  2012

The Wall Street Journal

Big U.S. banks are reopening the lending spigot amid signs that an improving economy is spurring companies and individuals to borrow more.

On Tuesday, Citigroup Inc. and Wells Fargo & Co. recorded their strongest loan-growth numbers since the financial crisis. The figures confirm a warming trend highlighted Friday by J.P. Morgan Chase & Co.

The lending gains mark a change from the past few years, when lackluster figures opened the banks to criticism from politicians and others that the firms’ tight grip on their cash was keeping economic growth under wraps. Banks responded that, after the bursting of the credit bubble that led to the financial crisis, consumers and companies were unwilling to borrow.

The data offer the latest signal that the deleveraging that swept the economy following the 2007-08 turmoil may be easing.

“Companies that are credit-worthy haven’t been in a borrowing mood, but we are starting to see that change,” said Jeffrey Harte, a principal with Sandler O’Neill + Partners LP.

At Citi, retail-banking loans rose 15% from a year ago to $133 billion, as the New York bank lent more to individuals and local businesses. At San Francisco-based Wells, commercial and industrial loans rose 11% from a year earlier to $167 billion at Dec. 31, amid what Chief Financial Officer Tim Sloan called broad-based growth.

All told, loans outstanding at the companies and J.P. Morgan rose by $41 billion from a year ago in the fourth quarter, to $2.14 trillion. That’s the first increase for the three giant lenders since 2008, when crisis-related acquisitions led to big expansions at J.P. Morgan and Wells Fargo. Bank of America Corp., the second-biggest U.S. lender after J.P. Morgan, is due to post its fourth-quarter numbers on Thursday.

The expansion is good news for the U.S. economy at a time when unemployment remains high and investors are fretting about the prospect of an economic downturn or market shock spurred by Europe’s debt crisis. Increased credit availability stands to help U.S. businesses that have been looking to finance new growth.

Demand is “everywhere,” J.P. Morgan Chase Chief Executive James Dimon said during a conference call last Friday. “Industrial, consumer, Asia, Latin America, trade finance, corporations, all types of corporations.”

The lending pickup is a bright spot in a mostly dour big-bank earnings season featuring declining revenue and mixed profits. Big U.S. financial firms are under pressure in the markets as weak economic growth, tighter regulation and a decline in trading and deal making crimp their earnings outlooks. Citigroup stock fell 8.2% on Tuesday following its weaker-than-expected fourth-quarter earnings report; Wells Fargo edged up 0.7%.

But strong lending growth, as long as the loans are of high quality, should boost earnings in coming years.

“From what we can see so far, there is actual demand for loans, as opposed to banks going down the credit spectrum and loosening their standards,” Sandler’s Mr. Harte said.

The lending gains are being driven in part by a retreat by European lenders tied to the region’s debt crisis. As banks on the continent sell assets to raise capital and reduce their dependence on scarce dollar funding, big U.S. lenders are stepping in. Mr. Dimon said on Friday that “a little bit” of the bank’s lending increase can be attributed to a pullback in lending by hobbled European competitors.

The banks’ numbers aren’t the only source of positive signs for the economy. Household borrowing on credit cards, car loans, student loans and other kinds of installment debt rose at a 9.9% seasonally adjusted annual rate in November, the Federal Reserve said this month, marking the fastest monthly increase since November 2001.

Recent borrowers include Tom and Tevie Dante Fraser, who closed in September on a new credit line for their Fulton County, Ga., classic-car business. They got the line and refinanced a mortgage on their showroom with Wells after the bank they had borrowed from previously was taken over by a competitor.

The new loan will let the couple make opportunistic buys at the car auctions “on the spot,” Ms. Fraser said, allowing the couple to expand their business.

At Citigroup, corporate loans surged 24% from a year ago to $219 billion. Another bright spot was trade finance—the management of money, credit and investments for large corporations; Citigroup was able to increase this type of lending by 50% in the period, as it picked up share from European banks that are paring back as a result of the region’s debt crisis.

“In the fourth quarter, we began to see some good demand for loans pretty much spread around the world,” Vikram Pandit, Citigroup’s CEO, said on a conference call with analysts and investors on Tuesday.

J.P. Morgan’s total loan book was up 4% during the fourth quarter, as lending to middle-market and corporate banking clients rose 12% and loans retained by the investment bank were up 28%. Executives said the latest-quarter gain would have been 9% if the firm hadn’t been allowing loans tied to its 2008 acquisition of Washington Mutual Inc. to run off, or mature without being replaced by new loans.

“I believe you are seeing real loan growth,” Mr. Dimon said.

At Wells Fargo, commercial and industrial loans rose 11% from a year ago, while commercial real-estate lending rose 6.6%. The figures were boosted by loan purchases, particularly from retrenching European lenders, which CEO John Stumpf said would continue. The bank recently purchased loan portfolios from Allied Irish Banks and Bank of Ireland, both of which are retrenching following government bailouts.

But the European shake-out is far from the only driver of loan growth.

Ronald Duffy closed last Friday on a $600,000 loan from Wells Fargo that he says he will use to a buy a laser-cutting machine for his company, Laser Cutting Services in Tualatin, Ore. He expects the new machine to allow him to take on more capacity at lower rates.

“The banks had been very tight-fisted, and they are still being extremely cautious,” Mr. Duffy said. “But they are lending to companies that they consider to be an acceptable risk.”