The loan demand balancing act

Kai Ryssdal (0:01)

We got some earnings, we got some AI and we got some toys from American public media. This is Marketplace.

In Los Angeles, I'm Kai Ryssdal. It is Tuesday today, 20 October. Good as it always is. Have you along, everybody. Hey, does anybody remember Silicon Valley Bank?

No? What about Signature or Silvergate? They were, emphasis on the past tense, the three biggest name regional banks that went under back in the spring of 2023 The Wall Street biggies get all the press, of course, here included. But my point is that one ignores the regionals at one's peril, which is why we are going to start with them today. Some of the big banks reported weaker than expected revenue from their trading desks last week, if you remember that, and from advising companies on mergers and acquisitions. And both of those lines of business have indeed been volatile this year, which is a long way of saying we got earnings reports from KeyCorp and Mercantile Bank and Western Alliance, among others this morning, which leads us to Justin Ho and the state of the economy at the regional bank level.

Justin Ho (1:17)

Regional banks don't advise many big corporate deals or trade much stock or many bonds, but they do make plenty of loans, especially to mid-sized companies.

Nate Tobik (1:27)

It's going to be the big health care companies in town or it's going to be large regional employers.

Justin Ho (1:33)

That's Nate Tobik, the founder of Complete Bank Data. Several regional banks have reported that loan demand from those kinds of companies has been strong lately. Tobik says that's in part because companies borrowed a lot right after the pandemic, back when rates were low.

Nate Tobik (1:47)

Typically, commercial loans have a five-year reset period, and so that enormous bubble of initial financing is all coming up on its reset right now.

Justin Ho (1:58)

That means borrowers are going to have to refinance those loans at much higher interest rates. But Jeffrey Roach, chief economist with LPL Financial, says many banks have been trying to keep their rates competitive to win over new customers.

Jeffrey Roach (2:10)

Which suggests that banks are willing to take on a little bit of that risk and seeing that the demand is stable and the corporate sector is stable.

Justin Ho (2:19)

Roach says companies are feeling stable because consumer demand has been stable.

Jeffrey Roach (2:24)

We have not seen an increase in unemployment, so we really haven't seen pressure on the income side. Hence, you still see fairly healthy demand.

Justin Ho (2:35)

But remember, these earnings reports we're talking about only cover the third quarter of this year.

Mayra Rodriguez-Valladares (2:39)

And it didn't fully incorporate the effects of the Federal Reserve raising rates.

Justin Ho (2:45)

Mayra Rodriguez-Valladares runs MRV Associates, which advises lenders on risk.

Mayra Rodriguez-Valladares (2:50)

If the Fed continues to raise rates, even if it doesn't do so before the elections, let's say it does so afterward or in 2027, you're going to start to see loan demand going down.

Justin Ho (3:03)

And she says banks might start getting pickier about the borrowers they want to lend to. I'm Justin Howe for Marketplace.

Kai Ryssdal (3:10)

It wasn't just regional banks reporting today. SpaceX, which I remind you is an artificial intelligence company with a rocket subsidiary, said after the bell it had just had its first profitable quarter as a publicly traded company. Netflix, the OG streamer service, reported a 12% jump in revenue last quarter. Not bad, but that was its lowest revenue growth in three years. Not good.

Elsewhere, at the corner of Wall Street and Broad and Lower Manhattan, Bluechip's up, the rest of them flat-ish. We will have the details when we do the numbers.

There's news today of big box retail in the form of Walmart and Sam's Club, which Walmart actually owns. Sam's Club, of course, after Sam Walton, the founder of the whole thing. Anyway, the two have, at least from the outside, operated mostly separately, but the head office announced today it's going to start bundling subscriptions for Walmart Plus and Sam's Clubs Plus. $120 a year, should you be interested. At first glance, it is a play to take on Amazon and Costco, yes. In this era of dyspeptic consumers and rising inflation, though, it may well be about something else entirely. Marketplace's Kristin Schwab has more on the importance of value in retail right now.

Kristin Schwab (4:44)

Generic products are maybe the ultimate example of consumers' newfound passion for value. Just a few decades ago, they were something shoppers hid at the bottom of their grocery carts.

Aaron Cheris (4:54)

It was the store brand, but it was like the black and white can that said beer on it.