Borrowing money

Loans are strong as borrowers leverage their credit

Over the past few days, we have received several earnings reports from major banks in the country. And on the surface, things weren’t so pretty. Monday, Goldman Sachs said profits fell nearly 50% compared to last year, partly due to a slowdown in corporate transactions. This helpd drive down Bank of America earnings too.

But when you look a little deeper into these reports, you’ll find that it’s not all bleak. In fact, banks have reported that personal and business lending has increased over the past year.

The main reason consumers borrow more is to spend more on their credit cards.

“I mean, it’s still full steam ahead, I think, from a credit standpoint,said Andrew Davidson of Comperemedia. People are also taking out personal loans and using buy-it-now and pay-later services, he said.

“You have this extremely competitive environment where consumers have more access to credit than ever before,” Davidson said.

Meanwhile, corporate borrowing has grown at the fastest rate in nearly 15 years, said Mike Mayo, banking analyst at Wells Fargo Securities. He said that’s partly because companies have been trying to build inventory.

“You’re also seeing more business expansion,” Mayo said. “And that’s been put on hold to some degree during the pandemic.”

Many business owners have taken out loans because they fear that if they wait, those loans will become too expensive, said Karen Kerrigan, CEO of the Small Business and Entrepreneurship Council.

“I mean, the cost of capital is only going to go up as rates go up because the Fed, you know, is making additional moves,” she said. Kerrigan said the rise in corporate borrowing could also be a sign that companies want cash to help them weather a downturn.

In fact, the banks themselves say they are setting aside more money in case borrowers do not repay their loans.

It’s better to be the concerned banker in the beginning and save too much than to wait too late to recognize the losses,” said Nate Tobik, founder of Complete Bank Data.

But Mayo with Wells Fargo Securities said banks aren’t setting aside as many reserves as they did at the start of the pandemic.

“Then you were looking at unemployment rates that could approach 15%,” Mayo said. “Now unemployment is below 4%, and maybe it’s going up a bit, but that’s night and day compared to the pandemic.”

And right now, Mayo said, borrower finances are healthy.

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