By David Randall

NEW YORK (Reuters). Regional banks showing signs of accelerating lending growth in the coming week could signify an improvement in U.S. supply chain bottlenecks. Analysts and investors believe this would indicate a slowing down of economic recovery following the pandemic.

The federal Paycheck Protection Program, which was launched to combat the epidemic and financed approximately $520 Billion in loans to small banks in total, accounted for 63%. The program allowed small businesses to take loans that either could be forgiven or would have a 1% interest rate, according to the U.S. Small Business Administration https://www.sba.gov/sites/default/files/2020-07/PPP%20Results%20-%20Sunday%20FINAL.pdf.

According to Dave Ellison (a portfolio manager at Hennessy Funds), small businesses may be expanding and securing inventory by increasing their demand for loans with higher interest rates.

Ellison explained that while everyone has seen the benefits of the economy opening, banks have not. “The Paycheck Protection Program has resulted in very low loan growth.” Ellison stated that “The pandemic has severely affected small businesses,” and they are regional banks’ customers.

As of June 30th, small banks held 15% of total banking industry loans but an outsized share of Paycheck Protection Program loans, holding 31%, according to the Federal Deposit Insurance Corp https://www.fdic.gov/analysis/quarterly-banking-profile/fdic-quarterly/2020-vol14-4/fdic-v14n4-3q2020-earlyrelease.pdf.

After a 16.3%% drop in annual loan growth, the Federal Reserve and Oppenheimer data showed that commercial loan growth dropped 12% to September. Chris Kotowski of Oppenheimer, an analyst, stated that loan growth should be supported by rising inventories from auto retailers and suppliers.

“It seems likely to us that the next significant move is up — not down — for the simple reason that it can’t possibly come down as much as it already has,” said Chris Kotowski, an analyst at Oppenheimer.

Graphic: Is Commercial Loan Growth Flat? – https://graphics.reuters.com/MARKETS-LOANS/GROWTH/akvezamlmpr/chart.png

Steven Comery of Gabelli Funds said that an increase in the number of loans to regional banks is a sign that supply chain concerns are improving.

“If customers can’t get their products on the market, they won’t borrow to build inventory,” he stated. If we observe signs that supply chain problems aren’t improving, it will impact earnings forecasts through 2023.

The four largest U.S. banks reported mixed loan growth when reporting their earnings results Oct. 14, with J&P Morgan said loans were up 5% compared to the prior year while Bank of America (NYSE:) and Wells Fargo (NYSE:) reported declines. [L4N2R93KV]

Companies including First Community (NASDAQ:) Bancshares Inc, First Midwest Bancorp (NASDAQ:) Inc, and Zions Bancorp are expected to report earnings on Monday, while Fifth Third BancorpO> and United Community Banks (NASDAQ.) Inc will be reporting on Tuesday.

Shares of First Republic Bank The stock rose 1.5% following the creation of approximately $15 billion worth new loans by the bank. It also reported that the average Paycheck Protection Program loan amount was down 39% in the past quarter. According to Jefferies analyst Casey Haire: These new loan gains will likely make it more probable that the bank will adjust its guidance for the next quarters.

The sector shares are near records highs as concerns over regional bank lending growth come at a time where they have been under pressure. According to data from Refinitiv, regional banks are now up almost 37% year-to-date and just below their Oct. 8 high.

Ellison stated that despite these gains, regional banks still look appealing based upon valuations.

Regional banks in the S&P 500 trade at a forward price to earnings ratio of 13.5, well below the 21.2 of the broad S&P 500, according to Refinitiv data. Ellison stated that the value of mortgages will rise along with the yield from the benchmark Treasury (10-year Treasury).

He said, “Valuation does not pose a problem in the future.”