The FDIC’s Quarterly Banking Profile reported this week that commercial and industrial (C&I) loans rose 7% between 2Q15 and 2Q16. This represents a decline from growth rates in 2Q15 (+8%) and 2Q14 (+9%).
With this decline in commercial loan growth, how can individual banks develop structures and strategies to continue to drive growth in this key area? The following are some key considerations:
Identify and communicate key differentiators. Banks should gain insights from internal (salespeople, product staff, key executives) and external (current clients, suppliers, other partners) on what the bank’s key strengths and limitations are in serving commercial clients. Banks should combine this research with in-depth competitive analysis to identify key differentiators. These key differentiators then need to be consistently communicated across all communications channels.
Identify and leverage opportunities in vertical industry sectors.
Size and profile the opportunity: identify industry clusters within the bank’s footprint and/or sectors that have strong growth potential and that have traditionally been underserved by other banks. These sectors should be profiled to identify the key business and financial challenges of companies in this sector.
Develop and implement a plan to target this sector, which may include establishing a dedicated industry group (First Tennessee Bank recently created a dedicated music industry group in Nashville), and engaging with this sector (e.g., by creating industry-specific content and collateral, as well as participating in, sponsoring and even hosting industry events).
Develop thought leadership infrastructure and assets. Banks can develop a competitive advantage by creating compelling content in a mix of formats (reports, newsletters, infographics, blog posts, videos, surveys) and presenting this content in a consistent and visually-appealing format (e.g., using bullet points for quick scanning, images, callouts). Many leading banks have now created branded portals that provide content, tools and advice.
Leverage captive channels and use non-traditional channels for communicating to prospects. Traditional B2B marketing channels are under pressure, as business readership of trade publications is falling and direct mail response rates continue to decline. Banks need to invest in a broader mix of marketing media, including online, email, social media and events. Banks also have significant opportunities to leverage their existing service (and sales) channels, including branch, call center, online, mobile and social media.
Develop a commercial banking presence in non-traditional markets. Unlike retail banking, banks have more scope to develop their commercial banking operations outside their traditional footprint by opening beachhead offices in markets that have growth potential (overall or for specific industries) and where the bank feels it can compete effectively with incumbents.
—BMO Harris recently opened a commercial banking office in Dallas
—Wells Fargo opened a commercial banking office in Portland, Maine.
Although C&I loan growth has slowed, banks remain committed to continuing to grow their commercial loan portfolios. Banks that can clearly articulate and deliver their value proposition (and competitive differentiation) to their commercial clients and prospects will have increased their chances of success in this dynamic environment.
The leading U.S. banks reported a 10% y/y rise in average commercial and industrial (C&I) loans in 2Q15, based on an EMI analysis of the FFIEC call report data.
Interest income on C&I loans rose 5% y/y, indicating that downward pressure on commercial loan pricing persists. This is reflected in the following table, which shows consistent y/y declines in commercial loan yields. However, there are signs that yield are now stabilizing.
Most leading banks report that the commercial loan market is highly competitive. So, how are banks managing to grow their C&I loan portfolios at double-digit rates?
Banks are targeting specialty segments. Many leading banks reported that targeted vertical segments drove overall commercial loan growth in the second quarter. Comerica’s average technology and life sciences loans rose 20% y/y, compared to only 3% for total Comerica middle market loans. And while KeyBank grew its commercial, financial and agricultural loans by 12%, loans to the transportation sector grew by a hefty 42%. A bank’s selection of target segments depends on a number of factors, including segment size and growth, concentration of specific segments in their footprint; and the bank’s heritage in serving this segment. To more effectively build a presence in specific vertical markets, many banks are now creating dedicated teams that include industry experts. In addition, a number of banks are developing segment-specific content, which both establishes bank credibility and creates opportunities for prospect engagement.
There are signs of growth in commercial loan utilization. As the economy and business optimism improves, companies are more inclined to invest to grow their businesses. A number of banks are now reporting a slow-but-steady rise in commercial loan utilization. Regions reported a 97 basis point increase in line utilization during the quarter. Equally, Fifth Third’s commercial line utilization rose from 32% to 33% in the second quarter.
Banks are increasingly focused on optimizing commercial client lifetime value. As in consumer banking, banks are seeking to optimize relationships with commercial clients by taking a lifetime value approach and focusing not just on acquisition, but on all key stages of the relationship (including onboarding, retention and cross-sell). The effect of this approach for banks can be significant. Since the start of 2010, Huntington Bank has grown commercial relationships by 36%, but commercial relationship revenue by 72%. The percentage of Huntington’s commercial clients with 4+ services rose from 32.6% to 43.4% over the past three years. This long-term perspective may also help explain why yields on new commercial remain low. In discussing its quarterly financials, KeyBank claimed that “if we believe we have a client who wants a broad relationship and the credit metrics look good for us, we know that over time we can generate a profitable relationship, even if we are pressured a bit on the loan pricing.”
EMI analysis of 14 leading U.S. banks found 7.4% y/y growth in commercial and industrial (C&I) loans in the first quarter of 2014, down from a 7.9% y/y growth rate in 4Q13. Though three banks (Capital One, Fifth Third and Regions) reported double-digit loan growth, only Capital One exceeded the 4Q13 y/y growth rate. Six of the 14 banks—including two of the top three commercial lenders: Wells Fargo and Chase—had lower y/y growth in 1Q14 vs. 4Q13.
In addition, as banks compete aggressively for commercial loans in the current low interest rate environment, yields continue to decline. Of the 13 banks providing C&I loan yield data, all reported double-digit y/y basis point declines. Banks with the largest y/y declines included Fifth Third (-55 bps to 3.35%) and KeyBank (down 49 bps to 3.29%). For nine of the 13 banks, yields are now below 3.5%.
In spite of the slight decline in C&I loan growth rates, this loan category continues to propel overall bank loan growth. While the 14 banks generated total y/y loan growth of 2% in 1Q14, their non-commercial loan growth was just 0.4%.
The following are four quick tips for banks to maintain—and even accelerate—commercial loan growth:
Target specific geographic markets or vertical industry segments, where the bank already has—or can quickly develop—dedicated capabilities
Re-commit to the small business segment by providing services and support tailored to their unique characteristics and needs
Develop initiatives to increase commercial loan utilization rates (which continue to trail historic averages for many banks, although many banks did highlight recent growth in utilization rates)
Identify and dedicate resources to capture growth in particular loan categories (such as CRE), which have been ignored in recent years in the aftermath of the financial crisis