Banks and Fintech May Miss the Expected 2022 Lending Surge - Vested

Financial executives in a recent survey gushed optimistically about robust lending growth in 2022.  Commercial and industrial (C&I) loans as well as credit card usage, respondents said, will surge and do for profits this year what investment banking, trading, and mortgage refinancing did in 2021.  There can be little doubt that the Federal Reserve’s promises to raise interest rates and end quantitative easing will crimp trading and investment banking activity, but there is reason to doubt this projected lending surge at both banks and bank-like lenders.

The optimism expressed by respondents seems to rest on a remarkable thin body of evidence.  The Fed did track a powerful 11.4 percent annualized rate of advance in C&I lending last November and an even stronger 24.6 percent jump last December.  If this pace were to keep up all year, 2022 would see a nearly unprecedented gain in such lending.  It is little wonder then that financial executives – legacy banking and fintech – expressed the optimism they did.  But a broader view of the data makes matters look less promising.  This recent surge has come off a much less expansive environment.  C&I lending fell at an 11.1 percent annualized rate in the first three quarters of the year.  Even more telling, weekly data available for this year so far shows an outright decline in C&I lending, albeit at a moderate 2.4 percent annual rate.  This statistical picture implies that something special was happening in November and December that may not necessarily persist through the year.

And data from the Commerce Department offers an explanation.  Its accounting of the gross domestic product (GDP) tracks a remarkable $224.7 billion surge in inventory building during the fourth quarter last year.  That figure dwarfs just about anything recorded in the long history of this data series.  All that restocking required credit.  On the positive side, the ability of business so re-stock its shelves so lavishly suggests that perhaps supply chain problems are dissipating.  (Other evidence of such a dissipation shows in surges in imports and exports, 17.7 percent at an annual rate for the former and 24.5 percent for the latter.)  But this kind of catchup from past problems is not likely to be repeated going forward.  On the contrary, an abatement of supply chain problems should allow a return to just-in-time inventory management and a reduced need for credit in the conduct of business.  The loan data for the opening weeks of the year suggest that less remarkable future is already developing. 

If such a prospect were not sobering enough, the latest array of sales figures suggests that the post-pandemic recovery is losing momentum.  The fourth quarter GDP report looked powerful on the surface, but the 6.9 percent annual rate of advance in overall real GDP mostly reflected the inventory rebuilding alluded to in the previous paragraph.  Absent that, sales to consumers, businesses, and even government grew at a mere 2.0 percent annual rate, even slower that the Omicron-burdened summer quarter’s 2.3 percent pace of overall real GDP growth.  Meanwhile, monthly retail sales showed a minimal gain over the December January period, while the most recent data on new orders for capital goods (for December) declined 6.8 percent for that month alone.  Applications for new business formation, though up slightly in January, showed no sign of reversing the gradual decline tracked since the mid-year 2021 highs.  At the same time, new home sales fell slightly in January as did the rate of new residential construction.  These patterns could certainly turn around, but without a smart recovery, retailers and wholesalers are likely to meet what sales they have by drawing down on the inventory stocks they built up late last year, further reducing their need for credit. 

C&I lending may indeed show growth this year, and that would be a welcome improvement on 2021’s 7.4 percent decline.  But it should be clear that using what happened last November and December to forecast all of 2022 would be a mistake.  It would ignore both the context of that two-month surge and more recent news on lending and from the economy.  Unless the recovery recaptures its earlier post-pandemic luster – itself unlikely – the optimism expressed by these financial executives will be disappointed.  It would not be the first time that bankers – business people generally – confused their expectations with their hopes.      

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