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, found that 63% of those loans were made by small banks. 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.

An increase in the demand for higher-interest loans could indicate that smaller businesses are expanding their inventory, according to Dave Ellison, Hennessy Funds portfolio manager.

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.” He said that the pandemic had disproportionally affected small businesses and these are customers of regional bank branches.

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% decrease in annual loans growth in May and a 12% drop in commercial loan growth overall, September’s decline was 12%. 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: Have Commercial Loan Growth Slowed? – 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.

He stated that clients who can’t bring their products to market due to the supply chain won’t be borrowing money to buy inventory. We will see signs that supply-chain issues won’t go away, which could impact earnings projections for 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.

Tuesday, October 13, 2013, shares First Republic Bank (NYSE:) gained 1.5%. The regional bank issued approximately $15 million in loans, and the bank reported that its Paycheck Protection Program average loan balance fell 39% during the quarter. These gains in loans mean that it is likely the bank will increase its guidance over the next quarters, stated Casey Haire (NYSE:), an analyst at Jefferies.

At a moment when shares of the sector are at record heights, concerns about regional bank loan growth is causing concern. The year-to date, the regional banks have increased by nearly 37% and they are only a fraction of the Oct. 8 peak according to Refinitiv data.

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 indicated that valuations are likely to rise with the 10-year Treasury benchmark yield, which sets rates for mortgage loans.

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