Revolving lines of credit are being paid off, but that may not be great news for banks.
When the coronavirus pandemic hit, companies quickly used their lines of credit to consolidate liquidity, as much of the business activity came to a halt. Most of these borrowings took place in March, and evidence from analysts at JP Morgan suggests that many direct debits were “paid off much faster than expected.”
This is sort of a scenario of good news and bad news for the banks. The sector has been weighed down in recent months as investors fear banks will suffer heavy loan losses due to the coronavirus. Earlier this month, several banks hinted they would increase their loan loss reserves this quarter as much or more than in the first quarter. Any sign that companies are repaying their loans should be considered positive.
However, while few companies are now using revolving lines of credit – and some have used funds raised through bond issues to pay off their guns – there has been an increase in low-yielding Paycheck Protection Program loans. . The new mix of PPP loans and long-term bonds means that the big banks will see their net interest margins tighten, explained Vivek Juneja, analyst at JP Morgan, in a note Tuesday.
“The yield on commercial loans has probably declined because the drawdowns of the revolvers have been repaid because they offer returns greater than the 1% yield on PPP loans,” Juneja wrote.
Based on a review of data from the Federal Reserve and PPP loans, Juneja estimates that two-thirds of the money taken from revolving lines of credit has been repaid. Commercial and industrial loans increased by about $ 378 billion to $ 2.6 trillion between March 11 and May 6. Since May, the total has fallen to $ 2.5 trillion as of June 3, although the big banks are estimated to have distributed $ 150 billion in PPP loans.
In the short term, banks can benefit from the fees generated by what Juneja has called the “record bond issuance,” while the repayment of revolving loans contributes to banks’ capital ratios. Both represent short-term benefits that offset tighter interest margins.
The KBW Nasdaq Bank (BKX) index is down around 30% this year as the sector has had to contend with low interest rates and a weak economy.
In Tuesday’s trading, the index was up 1.4%, trailing a 1.8% gain in the
Write to Carleton English at [email protected]