You can see the thesis building and it is an ugly one: there is very little loan growth in this country because of a combination of lower demand and an unwillingness to lend. That tepid depiction's occurring despite all the great things about the economy that we thought were happening or at least were supposed to be occurring given the federal government stimulus from lower taxes.
That's the downbeat consensus that investors have cobbled together after all of the big banks reported and no one is bothering to dispute it or why it happened. That's why the bank stocks have all stalled. That's why no one wants to pay up for them.
I get it. There are all sorts of loan variations and kinds of debt that banks offer. You can see that some business and consumer loan growth trends, year-over- year, though, were terrific. But then you could also argue that linked quarter, post tax cuts, it was, indeed, not so hot versus hopeful projections. I have seen journalistic summaries of basically, on average, about 1% for the big four banks - Wells (WFC) , Citi (C) , Bank of America (BAC) and JP Morgan (JPM) , but when I look at all lines together I see low-single-digit ex the hobbled Wells Fargo which was, on average, about minus 1%. Not bad.
And when I look at the forecasts? I come up with, again, low single digit growth - basically at or slightly more than GDP.
But, when you overlay what was SUPPOSED to happen with tax reform you come up with a narrative that says "is that all there is? Business isn't picking up despite all of that new income?"
And then the killer: "no wonder the yield curve is flat. There is no real demand, and it is not picking up or the ten year would be north of 3% by now. All of this when the Fed is raising rates? Look out, a recession is on the horizon."
I rebel against this thesis. I can point to multiple lending lines at these firms that show me that all is alive and well. I see a situation where the banks are being disciplined in an environment where lending is more competitive than expected. Plus, and this is a really important plus, the banks are making so much money off of your deposits that you have a big bottom line, something that, to me, is pretty darned good. Something that makes them more than investible. Something that says that these stocks deserve a higher than 12 price-to-earnings multiple. Something that says be patient and buy.
Are they being too chary? Are they more concerned about profiting risk free than profiting in a risky way? Sure.
But is America slowing down and the lending growth is the ultimate tell of demand, and the health of the economy must be weakening despite the tax cuts?
I think that's a leap that I can't take. Business is just too good on too many other lines and there's so much money sloshing around in the deposit bases that the banks simply can pick and choose who and what they want to lend and still make a fortune. That's a pretty darned good situation for both the banks, specifically, and the country in general.
Now, let's look at it another way. Let's say that the banks are lending, in aggregate, at 4% or even more, double the current gross domestic product, you know what we might be hearing about?
How about "they are getting reckless again. They are lending to everyone and we are going to see a big jump in non-performers so even though we may like the eps, it's not going to continue. Sell, sell, sell."
I think that, in the end, banks are, indeed, lending at the pace of GDP growth, and we haven't yet seen a big acceleration from the tax cuts because we aren't even in the bottom half of the first inning. The banks are open and ready for business and they are content in having big profits, while not doing anything reckless or too risky to stretch the quarter's gains.
In other words, taking your cue from the banks for the economy? I think you can do a lot better by looking at business lines from 30,000 feet: autos better, mortgages better, credit card better, construction better.
I'm not buying the "tax cuts not bringing about growth" thesis. I am not looking at the flat yield curve and saying recession.
I am saying "things are good, not electric, not over-heated but good and responsible" while the banks are the healthiest, not since the Great Recession started, but perhaps, since the big four were created before the deluge.
If that's a thesis for you to sell these stocks and bet against the country, be my guest. I just can't reach that very dismal conclusion, either for the banks or the country.