Leading U.S. Banks Maintain Commercial Lending Momentum

Strong growth in commercial lending for leading U.S. banks has offset declines in other loan categories in recent years, but coming into 2014, there was evidence that the rate of growth in commercial lending was tailing off.  However, EMI’s analysis of second quarter 2014 financials for 14 leading banks shows that commercial loan growth remains robust.  Average commercial loans rose 8.4% between 2Q13 and 2Q14, up from a 7.4% y/y growth rate in 1Q14.

av_commercial_loans_2Q14

10 of the 14 banks reported stronger y/y growth in 2Q14 compared to 1Q14.  Most banks attributed the stronger growth to improved business confidence.  Other factors that drove commercial loan growth included:

  • Slow but steady growth in commercial loan utilization: for most banks, loan utilization is well below historic norms, but there has been a gradual improvement in this metric in recent quarters.  Fifth Third reported that its commercial loan utilization rate rose from 30% in 1Q14 to 32% in 2Q14.  Chase’s loan utilization grew three percentage points in the first half of 2014 to 33%, but this remains well below the 40% level that Chase considers to be the historic norm.
  • Industry targeting propelling overall commercial loan growth.  A number of leading banks attributed a significant part of their growth to their targeting of specific industry segments.  Huntington Bank reported that half of its commercial loan growth came from targeted verticals.  Comerica reported strong y/y growth in its technology and life sciences (+32%), as well as its energy (+10%) portfolios.

As banks have been pushing to grow their commercial loan portfolios in recent years, yields have been steadily decreasing.  So, with banks continuing to report strong commercial loan growth in 2Q14, did loan yields continue to decline?  The answer: yields continued to decline on a y/y basis for most banks, as the market remains very competitive.  For the 11 leading banks in the chart below, 10 reported double-digit basis-point declines in commercial loan yields between 2Q13 and 2Q14.  And two of the banks—U.S. Bank and Bank of America—now have yields below 3%.  However, there are some signs that the decline in yields is beginning to taper off; three of the banks—Fifth Third, Capital One and Key—reported q/q increases in their commercial loan yields.

commercial_loan_yield_2Q14

Assuming that economic growth and business confidence continue to grow, demand for commercial loans should also continue to remain robust.  The following are four areas where banks should concentrate efforts in order to propel their commercial loan growth:

  • Identify and target high-potential commercial segments.  Banks need to look at both external and internal factors in identifying high-potential segments.  The external factors include segment size and growth rates, as well as segment clusters within the bank’s commercial banking footprint.   Internal factors include having the required in-house skills, experience and product solutions to effectively target these segments.  Industry sector represents the most effective segmentation criterion, given the fact that companies within industries tend to have similar characteristics and needs.  However, banks should also look to identify opportunities using other business segmentation criteria, such as ethnicity and gender.
  • Develop consistent marketing for all commercial banking solutions.  Due to their silo-ized structures and cultures, different groups within a commercial banking organization may develop their own marketing and sales communications, which can create confusion for clients.  Banks should create an overall value proposition for their commercial banking operations, as well as guidelines for messaging and creative executions, to provide a unified face to the client.
  • Capture cross-sell opportunities.  Again due to their traditional structures and cultures, banks have often fallen short in developing synergies across business units and selling the entire bank to the customer.  However, banks like Wells Fargo and Huntington have been steadily growing commercial cross-sell rates.   Banks should build programs to grow referrals rates between different business units, and should incorporate both retention and cross-sell goals into commercial bankers’ compensation structures.
  • Invest in Content marketing.  In a world where we are overwhelmed with information, commercial clients will be attracted to a bank that can provide insights and advice on various topics.  In developing content for commercial clients, the topics need to be of interest and importance to the client.  They also need to be topics on which the bank can speak authoritatively.  And lastly, banks need to take into account that the objective of content marketing is not to promote its products and solutions, but rather to position itself as a valuable source of intelligence and advice.

Banks bucking slowdown in commercial loan growth through industry targeting

The growth rate in U.S. C&I loan portfolios has been decelerating in recent quarters (see EMI’s March 4th blog post).  To buck this trend, banks are trying to identify and target vertical industries with significant growth potential and/or that have not been effectively targeted in the past.

The following charts show some industries where banks reported strong loan growth in 2013.
(The figures in parentheses show the index of industry-specific growth to overall commercial loan growth, with average growth = 100.  For example, Fifth Third’s retail industry loan portfolio grew 26% between end-2012 and end-2013, which is almost five times higher than Fifth Third’s overall commercial loan growth of 5.4%.)

The following are some quick tips for banks to enhance their vertical industry targeting efforts:

  • Size the overall market within the bank’s footprint; identify clusters
  • Assess industry health and growth potential by analyzing key performance metrics (e.g., gross output, profitability, business formation and survival rates, international trade volume)
  • Identify unique financial needs, usage profiles and decision-making processes through a combination of primary and secondary research
  • Develop targeted marketing campaigns, to include tailored content as well as investments in industry-specific media (events, trade publications, online and social media sites)
  • Create, train and support dedicated industry teams; concentrate team deployment around clusters

Growth in U.S. Bank’s Commercial Loan Portfolios Continues to Slow

The FDIC recently published detailed bank data as of end-4Q13. This data revealed that U.S. banks are continuing to grow their commercial and industrial (C&I) loan portfolios, although the y/y growth rate has been steadily declining, from a high of 16% in 2Q12 to 7% in 4Q13. C&I loan portfolios declined significantly following the financial crisis, reaching a low of $1.2 trillion in 2Q10. Since then, C&I loan portfolios have grown 38%, and have driven overall U.S. loan growth.  The recent deceleration in the C&I loan growth rate had reduced the gap between C&I loan growth and overall net loan growth, from a high of 12.3 percentage points in 2Q12 to 3.7 percentage points in 4Q13.

Within C&I loan portfolios, overall growth has been driven by individual loans valued at more than $1 million. Mirroring overall C&I loan portfolios trends, y/y growth for >$1MM loans peaked at 21% in 2Q12, and has been declining since then.  Meanwhile, small business loan portfolios (C&I loans with initial values of <$1 million) only started to report y/y growth at the end of 2012.  This growth rate reached 3% in 2Q13, but has slowed since, to 1.4% at the end of 2013. This slow recovery in small business lending has been due to both tight bank underwriting (which is only now beginning to ease), as well as low demand for small business loans due to uncertainty regarding the prospects for economic recovery. Interestingly, within this C&I loan <$1MM segment, strongest growth is being seen in the <$100K loan segment, which includes small business credit card loans. This <$100K portfolio rose 4.2% y/y in 4Q13, up from 2.9% in 3Q13.

Strongest growth in C&I loans between end-2012 and end-2013 was reported by mid-sized banks with $1-$10BN in assets. The largest banks (>$100BN in assets) had trailed the industry average, as banks like JPMorgan Chase and Wells Fargo reported anemic loan growth. C&I loan portfolios for small community banks (<$100MM in assets) were unchanged y/y, as they struggle to compete with the broad commercial product range and cutting-edge online and mobile tools on offer from the larger banks.

Given the slowdown in the growth of C&I loan portfolios, how can individual banks continue to build their commercial loan portfolios?

  • Target specific geographic markets or vertical industry segments, where the bank already has—or can quickly create—dedicated capabilities
  • Re-commit to the small business segment
  • Develop initiatives to increase commercial loan utilization rates (which continue to trail historic averages for many banks)
  • Identify and dedicate resources to capture growth in other loan categories, which have been ignored in recent years