Garnet Capital Advisors Blog

The COVID-19 pandemic has had devastating effects on many people and companies. Ordinarily, in a crisis, you would expect banks to extend more loans to cash-strapped consumers.  However, the actual situation is different. The total loans extended by banks have dwindled while the banks' deposits have increased significantly.

According to Bank Reg Data, the total assets of US banks increased by 3.11% (860 billion) in the first quarter to reach $22.564 trillion. Cash and balances grew to an all-time high of $3.629 trillion, while total securities held by banks increased $366 billion to reach $5.48 trillion.

Banks are Hesitant to Lend

While bank's deposits have increased by $3.92 trillion in the last five years, the financial institutions have experienced a dip in loans for four quarters in a row. In the first quarter of 2021, loans plunged $16.35 billion. Loans and leases stand at $10.14 trillion, slightly less than the $10.17 trillion outstanding in 2019.

These statistics show banks are wary about lending. Additionally, the consumer side is reluctant to take on debt, other than mortgage debt. Here are some reasons bank loans have dipped.

• First, consumers are alarmed by potential economic instability due to COVID-19 effects. As a result, households are holding on to cash and savings. According to the National Bureau of Economic Research, most people have used stimulus payment to save and pay debts.
• Also, people are spending less due to lockdowns.
• The government has reduced interest rates to boost the economy due to the pandemic.  This has depressed bank net interest margins. 
• Additionally, stimulus packages have reduced the demand for loans. This led to a significant decline in interest earnings by some banks. 
• While there is a low demand for loans, the banks have also tightened their lending standards. Many banks have tightened lending standards, which exacerbates lower demand.
• The pandemic caused widespread loss of employment and disruption of economic activities. As a result, the banks were more conservative in offering loans. The subsequent waves of COVID-19 only exacerbated the situation. 
• Most people resorted to saving more and spending less during the pandemic. Similarly, companies turned to capital markets for funds rather than the banks.

Banks Deposits Continue to Surge 

The loan book for America's banks shrank by 0.5% for the first time in decades. This is the second time the loan book is shrinking in about 28 years. Apart from JP Morgan, the rest of the big four banks' loans and leases plummeted. According to Security and Exchange Commission, Citigroup loans and leases declined by 3.4%, while Bank of America Corps diminished by 5.7%. 

Although the COVID-19 pandemic has caused the loan book to shrink significantly, experts project the loan growth would resume this year. However, there must be enough momentum to give consumers enough confidence to borrow. 

Luckily, bank deposits have increased significantly. For instance, JP Morgan's deposit growth in the first quarter stood at $273 billion. With the economic recovery, the banks can take advantage of the massive deposit increase to extend loans to their customers. There is a ready untapped market to support aggressive lending. 

Slump on Interest Rates Income 

Despite rock bottom interest rates on loans, only 3% of small businesses are interested in adding debts. Many of these businesses have paused investment in new projects machinery and equipment. 

Government stimulus packages and reduced expenses have enabled people to manage their funds. As a result, consumers are settling balances rather than increasing borrowing. Net credit card loans decreased across the board in the pandemic. 

Income from interest is a major source of income for banks. Interest rates are hovering on a record low, affecting banks' bottom line. The Net Interest Income (NII) fell 16% in the fourth quarter.

Therefore, banks must grow their bank loan book to prevent deposit increases and counter the effects of low-interest rates. Here is the point. The huge deposit increase and shrinking loan book are tell-tale signs of low momentum to lend. With low income from interest on loans, bank profits are stressed. 

Investing in Seasoned Loans 

The good news is that banks can boost loan books and, in turn, profits by investing in seasoned loans to increase their income. The whole idea is to diversify the portfolio and generate more profits.

That said, choosing the ideal seasoned loan portfolio is not a cakewalk. Banks should not go around buying any loans. Financial institutions must choose high-quality seasoned loans. This is where Garnet Capital comes in. 

Why Choose Garnet Capital 

Garnet Capital helps banks identify seasoned loans to boost their loan book. Borrowers have exhibited a good repayment history and are unlikely to default available in seasoned loan portfolios.

Our company has a reputation of offering excellent loan sale service for 25 years. We adhere to the highest levels of integrity and trust. Whether your financial institution deals with commercial, residential, or consumer loans, we will help you. Additionally, we adhere to international data security standards, including the SOC 2 and PCI DSS.

Since loan portfolios vary significantly, Garnet Capital endeavors to offer custom services for each transaction. We ensure both sellers and buyers are well-versed in the transition details. Buyers can view each portfolio and assess whether the loans meet their unique risk/reward parameters. 

We offer professional analysis for each transaction and address the specific needs of both sellers and buyers. Our attention to detail is unmatched. We will find a portfolio that meets your investment needs, ultimately leading to a seamless close. The best part is we have experience dealing with all types of assets. In 2020, Garnet sold $8 billion of loans in 120 transactions.

Final Words 

As normalcy returns, more people will likely be able to access more loans through banks. Emerging new strains and increasing cases of infections could lead to restrictions.  As a result, financial institutions are exercising a wait-and-see approach.

That notwithstanding, the economy is in recovery mode. Any serious investor can't afford to lose the opportunity of investing in seasoned loans. As the economy rebounds and becomes more vigorous, households are likely to borrow more. At Garnet Capital we help financial institutions invest in quality seasoned loans. Don't just take our word for it. Try our services today.