Category Archives: Commercial Banking

Commercial Loan Growth Slows in 1Q14…But Remains Key Lending Category for Leading U.S. Banks

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

 

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