What Lies Ahead For US Banks In The Second Half Of The Year?

Banks, a barometer of the broader U.S. economy, are seeing early signs that the tariff-induced pause in activity is lifting.

It is by no means the jubilant scenario bank CEOs envisioned in November, when President Donald Trump’s victory ushered in optimism about a boom in loans. But it is a welcome shift from April, when Trump’s tariff plans sparked fears that a recession would cause borrowers to default.

Bankers and bank investors hope the fog keeps clearing, paving the way for businesses to pull the trigger on projects they paused this spring.

“We’re not out of the woods here, but it has a better feel than we’ve had in a while,” said Scott Siefers, a bank analyst at Piper Sandler, though any loan rebound would be coming from “a very low base of expectations.”

Banks Cautiously Optimistic On Loan Growth

Loan growth has been sluggish for a few years, as high interest rates dampened borrowing and businesses awaited the results of the 2024 election.

The slow pace continued in the first quarter, with median loan growth at banks up just 0.6% compared to a quarter earlier, the lowest rate in over three years, according to S&P Global Market Intelligence.1

Trump’s tariff announcement in April threw a wrench into corporate planning, but bank CEOs have said recently they’re seeing activity rebound as trade tensions simmer.

Some clients remain in a “wait and see” mode, but they’re getting “a little more clarity every day,” Bill Rogers, CEO of the North Carolina-based regional bank Truist Financial (TFC), said at a Morgan Stanley banking conference.

Bank of America (BAC) is “still growing loans OK,” CEO Brian Moynihan said at the conference, with loan growth above industry averages. But executives have been “careful about overexpecting,” he added.

How Are Bank Borrowers Doing?

The good news is that bank balance sheets remain healthy, despite some persistent pockets of stress.

High interest rates are weighing on some commercial real estate loans, particularly on less-desirable office buildings and apartment buildings in overbuilt markets.2 Some trucking companies are still reeling from consumers spending more on travel instead of COVID-era splurges on appliances, furniture and other goods that needed shipping.3

Lower-income consumers have felt more pain from inflation and high interest rates. But overall, the share of consumer debt that borrowers were late on was 4.3% at the end of March, according to the New York Fed.4

The number of past-due payments has increased from 2020 and 2021, when stimulus help and elevated savings helped borrowers pay back debt. But the rise has been far from alarming, with late payments hovering around 2019 levels.

What had been worsening trends in credit cards and auto loans “leveled off last quarter,” Daniel Mangrum, a New York Fed economist, said in May.5 But he also flagged that past-due student loans officially got back on consumer credit reports in the first quarter, prompting a surge in late payments.6

What if The Economy Goes South?

Losses on bank balance sheets have gone up the last two years, but they’ve remained contained and well below historical averages, said Megan Fox, senior credit officer at Moody’s Ratings.

That could all change if the economy falters, but banks have built up large cushions to protect themselves from losses if that happens. The industry stashed away reserves starting in 2022, as decades-high inflation and a sharp rise in interest rates prompted economists to predict a looming recession.

“The banks are fairly well reserved,” Fox said, adding that they’ve prepared for a “downturn that really has yet to materialize.”

The Fed’s annual stress tests, released last week, showed that the country’s largest banks could withstand a downturn in which the unemployment rate jumps to 10%, stock prices plummet 50%, and housing prices fall by a third.

A downturn would mean the much-hoped-for loan rebound won’t happen, and bank revenues will suffer as a result, said Terry McEvoy, a bank analyst at Stephens Inc. But when recessions come, investors focus far less on revenues and look instead at banks’ capital position and whether their reserves are big enough to handle whatever comes next.

“Both capital and reserves, which are the true loss cushion for the banking industry, are very healthy today,” McEvoy said.