JPMorgan Chase & Co. (JPM), Wells Fargo & Co (WFC), Bank of America Corp (BAC): Will Banks Embrace the Return of Subprime Lending?

The road ahead in the short term doesn’t appear to be more fruitful for frugal lenders. Roughly two-thirds of large banks that responded to the survey noted the increased competition from other banks and nonbank lenders as a possible reason for eased credit standards — by far the most commonly acknowledged reason. As if spreads weren’t thin enough simply because of the flat yield curve, more competition will continue to squeeze margins on loans to the most creditworthy borrowers.

Anomaly or normality?
If interest rates stay low for an extended period and banks’ non-interest revenue lines remain flat, lenders may begin to make loans that offer a greater return — but, unavoidably, a greater risk. If greed and short-term pressures return (something they are known to do), subprime lending may not simply be a blip in the history of finance but a cyclical beast that is preparing its ominous return if lenders become too aggressive.

Banks will ultimately have to ease lending standards and find the point of equilibrium between generating returns for its shareholders and sporting a durable balance sheet. If done prudently, subprime lending can be profitable — much like well-managed credit card loan portfolios. However, if short-term pressures push lenders to too far down the risk spectrum, trouble will return.

The article Will Banks Embrace the Return of Subprime Lending? originally appeared on Fool.com and is written by David Hanson.

David Hanson has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo and (NYSE:WFC) owns shares of Bank of America, JPMorgan Chase, and Wells Fargo.

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