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RPT-Wall St Week Ahead-Regional bank loan growth could hint at healthier supply chains

(Repeats SCHEDULED COLUMN originally published on Oct 15, no
changes)
    By David Randall
    NEW YORK, Oct 15 (Reuters) - If regional banks show signs of
accelerating loan growth when they report earnings in the week
ahead, it could signal an easing of the supply chain bottlenecks
that have weighed down the U.S. economic recovery from the
pandemic, analysts and investors said. 
    Overall, small banks accounted for 63% of the approximately
$520 billion in loans through the federal Paycheck Protection
Program launched in response to the pandemic. The program
allowed small businesses to take loans that either could be
forgiven or would have a 1% interest rate, according to the U.S.
Small Business Administration https://www.sba.gov/sites/default/files/2020-07/PPP%20Results%20-%20Sunday%20FINAL.pdf.
 
    Increasing demands for new loans at higher interest rates
could signal that small businesses are securing inventory and
expanding, said Dave Ellison, a portfolio manager at Hennessy
Funds. 
    "It seems like everybody else has benefited from the economy
reopening but the banks because you've seen very little loan
growth" on account of the Paycheck Protection Program, Ellison
said. "The pandemic has disproportionably hurt small businesses,
and those are the customers of regional banks," he said. 
    As of June 30th, small banks held 15% of total banking
industry loans but an outsized share of Paycheck Protection
Program loans, holding 31%, according to the Federal Deposit
Insurance Corp https://www.fdic.gov/analysis/quarterly-banking-profile/fdic-quarterly/2020-vol14-4/fdic-v14n4-3q2020-earlyrelease.pdf.
    Overall, commercial loan growth fell 12% in September from a
year earlier after bottoming out with a 16.3%% decline in annual
loan growth in May, according to data from the Federal Reserve
and Oppenheimer. Yet rising inventories at auto suppliers and
retailers should bolster loan growth in the year ahead, said
Chris Kotowski, an analyst at Oppenheimer.
    "It seems likely to us that the next significant move is up
— not down — for the simple reason that it can't possibly come
down as much as it already has," said Chris Kotowski, an analyst
at Oppenheimer. 
    A healthy increase in new loans at regional banks would be a
strong signal that supply chain issues are moderating, said
Steven Comery, an analyst at Gabelli Funds. 
     "If clients can't get products to market because of the
supply chain they aren't going to be borrowing to build their
inventory," he said. "If we see signals that supply chain issues
aren't going away then that's going to impact earnings estimates
through 2023."
    The four largest U.S. banks reported mixed loan growth when
reporting their earnings results Oct. 14, with J&P Morgan said
loans were up 5% compared to the prior year while Bank of
America and Wells Fargo reported declines.  L4N2R93KV 
    Companies including First Community Bancshares Inc  FCBC.O ,
First Midwest Bancorp Inc  FMBI.O , and Zions Bancorp  ZION.O 
are expected to report earnings on Monday, while Fifth Third
Bancorp  FITB O> and United Community Banks Inc  UCBI.O  are
among those expected to report on Tuesday.
    On Wednesday, Oct. 13, shares of First Republic Bank  FRC.N 
gained 1.5% after the regional bank originated approximately $15
billion in new loans and reported that its average Paycheck
Protection Program loan balance was down 39% over the quarter.
Those gains in new loans will make it likely that the bank will
raise its guidance in the coming quarters, noted Casey Haire, an
analyst at Jefferies.
    Concerns over loan growth by regional banks comes at a time
when the sector's shares are trading near record highs. Regional
banks in the S&P 500  .SPLRCBNKS  are up nearly 37% for the year
to date and are just below the high they reached on Oct. 8,
according to Refinitiv data. 
    Despite those gains, regional banks continue to look
attractive based on valuations, Ellison said. 
    Regional banks in the S&P 500 trade at a forward price to
earnings ratio of 13.5, well below the 21.2 of the broad S&P
500, according to Refinitiv data. Valuations will likely rise
alongside the yield of the benchmark 10-year Treasury, which is
used to set rates for loans including mortgages, Ellison said. 
    "Valuation is not a problem for future gains," he said.

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Has Commercial Loan Growth Bottomed Out?    https://tmsnrt.rs/3p76W1t
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 (Reporting by David Randall; editing by Megan Davies and David
Gregorio)
 ((David.Randall@thomsonreuters.com; 646-223-6607; Reuters
Messaging: david.randall.thomsonreuters.com@reuters.net))
 
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