Monday, November 27, 2017

"Loan Growth Is in a Rut" says WSJ

That is the title of a front page article in the Wall Street Journal today.  The phrasing suggests that this is a problem.  Could it be that the headline writer does not understand the article, maybe, or it does suggest that the writer of the article is confused.

Commercial and consumer loan totals on bank books are still rising but the pace of growth is slowing.  The article wonders "why" in this "buoyant" economy, and suggests that financial stocks have been rising based on this expectation.  It could be suggested that financial stocks are rising, in fact, because loan growth is moderating.  Loans can always grow, but once on books of banks, corporations, and individuals they can be sticky.  If loans are not always needed, or granted, that can be good news.

Over the last 20 years in corporate America there has been a massive shift in labor demand and efficiency as technology that required major investment over many years has changed the structural nature of management.  That spending is ongoing but the benefits derived lead to less need for other types of capital spending.  And less people.

The key focus of the article is, in a roundabout way, the profitability of banks and the impact on stock price of weaker loan demand.  A strong economy is not measured by bank stock prices.  It is measured by the prosperity of a society and the opportunities for growth in creativity.  Banks are just one piece of the puzzle.

What was this all about?  The WSJ article simply did not hang together and make any point.  In dealing with that, what is written here has the same flaws but does eventually get around to making a point, admittedly a bit off point.

It's been a long day.

Postscript:    Bank stock prices will rise if a more positive yield curve develops.  Generally speaking, the big banks have enough deposits and loans to benefit significantly from a higher net interest margin.  Small banks that only are in that business will benefit too, but in the long run they are a more risky investment because their dependence can cloud credit standards over time.


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