Recession Risk Is Growing With Rate Hikes, Regional U.S. Banks Say

(Bloomberg) -- The heads of some of the largest U.S. regional banks see mounting risks for a recession brought on by the Federal Reserve’s interest-rate hikes, even as those increases are set to bolster lending revenue. 

Fed policy makers are struggling to contain consumer prices that surged 8.5% from a year earlier in March, with Chair Jerome Powell saying a half-point interest-rate hike “will be on the table” in May.

While the increases will benefit banks in the short-term by increasing the interest they collect on loans, executives say there’s a danger the central bank will tighten too aggressively.

“It could be hard to soft-land the economy,” Fifth Third Bancorp (NASDAQ: FITB ) Chief Executive Officer Greg Carmichael said in an interview. “In the latter part of 2023, we could be in a recessionary state.”

In the meantime, lending businesses are stronger. First-quarter loan growth was up a median 1.4% from the previous three months among a group of the largest publicly-traded U.S. banks that had reported results as of Thursday, according to data compiled by Bloomberg.

Excluding loan balances linked to the Paycheck Protection Program and an auto-loan portfolio the company sold, KeyCorp’s average loans were up 15% in the first quarter from the same period a year earlier. That helped to counteract weakness in investment banking at the Cleveland-based company, which CEO Chris Gorman attributed to market volatility.

“If you were going to do an initial public offering, you wouldn’t knowingly wade into a choppy market,” Gorman said in an interview.

In the near-term, the lender expects to see loans for the full year increasing by a percentage in the mid-teens, and other banks are similarly bullish.

Loan Forecast

PNC Financial Services Group Inc (NYSE: PNC ). expects average loan growth of 10% for the full year, Chief Financial Officer Robert Reilly told analysts and investors on an earnings call last week. The bank didn’t provide guidance on that metric when it reported first-quarter 2021 results last April.

Even with the loan outlook as rosy as it is, executives are mindful that the economic picture could darken.

“While we believe the economy is on sound footing in the near term,” Truist CEO Bill Rogers (NYSE: ROG ) Jr. said in a conference call with analysts Tuesday, “the headwinds of geopolitical uncertainty coupled with the inflationary environment and aggressive forecast for the tightening of monetary policy create a wide range of economic outlooks as we move further into this year and next.”

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