Loan growth slows at U.S. banks: Federal Reserve

(Reuters) - Loan growth at banks in the United States slowed in July, the U.S. Federal Reserve said on Friday, snapping a 10-month streak of acceleration.

Bankers that spoke to Reuters recently cited a combination of factors for the slowdown, including growing worries about the U.S. recovery, Europe's turmoil, concerns about federal spending and uncertainty about tax laws after the presidential election.

U.S. bank loans grew by 5.0 percent in July from the same month last year to $7.1 trillion - slower than the 5.3 percent growth in June 2012.

A month does not necessarily indicate a trend, but many analysts expect loan growth to continue slowing in coming months amid other signs of a decelerating economy.

The manufacturing sector contracted in July for the second straight month after expanding steadily for nearly three years. And gross domestic product grew an anemic 1.5 percent in the second quarter, seasonally adjusted and annualized, compared with 2 percent in the first quarter and 4.1 percent in the fourth quarter.

For banks, loan growth had been one of the few positives this year. In July, big banks posted second-quarter results marred by weak revenue and depressed trading profits, but helped by loan growth.

"The slowing economy may be taking its toll on the one real engine of ... loan growth that the banks were enjoying during the first several months of the year," Christopher Mutascio, an analyst at brokerage Stifel Nicolaus, wrote in a note earlier this week. Most major banks have launched cost-cutting programs.

Even companies taking on new loans are cautious. Take MacLean-Fogg Co, a Chicago-area company that makes auto parts and electrical transmission equipment.

The nearly 90-year-old company took out a $10 million loan late last year to finance a machine that will help it make gears for 8- and 9-speed transmissions, which are growing in popularity because of their increased fuel efficiency.

The company has orders in hand from customers so it is confident it will be able to pay back the loan, said MacLean-Fogg Chief Financial Officer George Cook. But the company is growing carefully because it sees risks ahead.

"Our business is generally strong, but we can feel it a little bit on the edges slipping," said Cook. "We can feel a little softness coming."

Companies such as MacLean-Fogg have been among the strongest sources of loan growth this year, Fed data show. Loans to commercial and industrial borrowers grew 14.2 percent in July compared with the same month last year. Commercial and residential real estate loans, in contrast, grew just 0.9 percent.

The industries that are producing loan growth include manufacturing, healthcare, technology and green energy, bankers said. Businesses connected to housing or construction continue to struggle.

"YOU HAVE TO HUSTLE MORE"

U.S. loans began growing in September, on a year-over-year basis. (Looking at loan growth compared with the same month a year earlier strips out any impact from seasonal differences in loan demand). September's growth was a mild 0.15 percent, but that figure steadily ramped up, accelerating dramatically in February.

Some of the recent loan growth has been the result of U.S. banks taking market share away from weaker European banks hoarding capital to meet new regulatory requirements. In the July Senior Loan Officer Survey conducted by the Federal Reserve, a "sizable fraction" of U.S. banks reported that business had increased due to decreased competition from European banks.

At a time when the economic and fiscal outlook is uncertain, growth is possible, but it is going to be a grind, said Perry Pelos, head of commercial banking at Wells Fargo & Co (WFC.N).

"We've shown in the past few years that we can grow in a very difficult environment, but it means we'll have to take share from other people. You have to hustle more. You've got to get more people in the market. You've got to outwork them."

Wells Fargo expects to add about 100 bankers this year to help win market share and other banks are looking to hire, too.

Mid-sized companies are using loans to make opportunistic acquisitions, said Laura Whitley, head of commercial banking at Bank of America Corp (BAC.N). Some companies are taking advantage of low interest rates to borrow money that allows them to issue dividends or buy back shares ahead of possible changes in tax laws.

"We may see a pullback in the second half because of lower (economic output), but companies are always going to be very opportunistic in how they tap the credit markets to their advantage," said Whitley. "That's why we have seen outsized (commercial and industrial loan) growth."

Larger companies tend to emerge from recessions faster than smaller ones and that is proving true in the current recovery, said Jordan Peterson, senior vice president for business banking credit strategies at PNC Financial Services Group Inc (PNC.N). In his area, which covers businesses up to $10 million in revenue, larger companies are more interested in loans than "micro businesses" under $1 million in revenue.

"In the small business world, I can tell you that we're doing more volume, but the demand is still not where we would like it to be," Peterson said. "It's still kind of soft."

Customized Manufacturing & Assembly Inc in Rochester Hills, Michigan, is doubling its credit line to $1 million for new equipment such as a robotic welder, said president Dan Harrison.

But the company is still cautious about the future, said Dave Glinka, Harrison's business partner.

"We're still not sold this economy is totally back yet, especially in the automobile business," said Glinka. "We're still seeing people going under."

(Reporting by Rick Rothacker in Charlotte, North Carolina; editing by Dan Wilchins, Gary Hill and Andre Grenon)