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

How Can Banks Maintain Commercial Lending Momentum?

Second quarter 2013 financials for leading U.S. banks reveal continued strong growth in their commercial loan portfolios. The chart below shows that 11 of 16 banks studied reported double-digit growth rates, with an average increase of 11%.  And most of the banks reported very strong commercial pipelines in the second quarter.

Some of this growth can be attributed to improved confidence among U.S. firms. In addition, banks are generating strong growth rates by targeting specific vertical industries that have high-growth potential and/or have been traditionally underserved by banks.  These large U.S. banks can assign dedicated teams and create customized campaigns for different industries, which creates a competitive advantage over smaller banks who lack the necessary scale to justify this incremental sales and marketing investment.

However, increased competition in the commercial lending market (particularly in the general middle market sector) is contributing to declines in yields; each of the leading banks in the chart above who included commercial loan yield data in their 2Q13 financials, reports a significant y/y decline. On the other hand, commercial loan net charge-off rates are both lower than consumer loan charge-off rates and in many cases have fallen significantly over the past year.

In this high-potential, but increasingly competitive, commercial lending and banking environment, banks need to effectively direct their sales and marketing budgets to initiatives that can both continue to drive customer acquisition as well as optimize existing customer relationships. Initiatives include:

  • Targeting: identify industry segments or geographic markets with strong commercial loan potential.  Allocate sales and marketing resources based on market opportunity, competitive intensity, as well as the bank’s own strengths in these markets.
  • Customer relationship optimization: leverage the full power of the bank by working with other units to generate customer referral and cross-sell streams.
  • Performance benchmarking: assess commercial banking performance throughout the bank’s footprint.  Diagnose reasons for the over- or under-performance of particular groups.  Apply these insights to develop programs to raise overall performance.
  • Loan usage stimulation: develop messaging to drive commercial loan utilization rates, which are currently low by historical standards.
  • Content development: develop and deliver content that provides answers to customers’ financial needs and position the bank as a trusted financial advisor. Ensure the content addresses the different business and financial challenges of various targeted segments.  Distribute the content through multiple delivery channels to reflect changes in how content is now consumed.
  • Sales tool creation: Invest in sales force automation, sales support tools and training to ensure that commercial prospects are moved seamlessly through the sales funnel and generate a strong conversion rate.
  • Customer outreach: develop customer communications to support ensure that relationship managers proactively engage with customers on a regular basis, but in particular at critical stages of the customer life cycle (for example, during the first 90 days)
  • Inbound communications capture: provide a range of options for customers to contact the bank, and direct these customer queries to the most appropriate bank unit or individual.

Large banks continue to dominate U.S. commercial lending

EMI analysis of the latest FDIC U.S. bank data for the first quarter of 2013 reveals a number of interesting trends in commercial and industrial (C&I) and small business lending:

  • U.S. banks’ C&I loan portfolios continued to grow at double-digit rates year-on-year (y/y) in 1Q13, rising 12%, the same rate of increase as in 4Q12.  Commercial loan growth continues to outpace overall loan growth of 4% y/y.  Small business loan portfolios (defined as C&I loans with values of less than $1 million) are finally showing signs of life, rising 2% y/y.  This follows a 0.4% y/y increase in 4Q12, which was the first such increase in years, as reported in a February 2013 EMI blog post.
  • Large banks dominate C&I lending.  Of the 6,500 banks in the U.S., just 17 have more than $100 billion in assets.  But these 17 banks account for 57% of total loans and 60% of C&I loans.  In addition, the large banks (with assets of more than $1 billion) are reporting stronger growth in their C&I loan portfolios than their smaller counterparts.

  • Among the top 20 C&I loan portfolios, banks reporting above-average growth include:
    • HSBC Bank USA (+27%)
    • Bank of America (+22%): representing a significant growth rate for the bank, which has trailed other leading national banks for loan growth in recent years.  The bank reported in the Financial Times in February 2013 that it was increasing investment in its commercial bank, including the addition of 50 bankers as a first step.
    • Sovereign Bank (+21%)
    • Fifth Third (+17%): benefiting from a focus on specific vertical markets, including the establishment of a new energy lending unit in late 2012.  (See an EMI blog post from February 2013 on driving commercial loan growth through vertical industry targeting.)
    • BB&T (+17%)
    • KeyBank (+16%)
  • Turning to small business loans, smaller banks with less than $1 billion in assets have a greater share of this market, accounting for 23% of all small business loans (compared to 11% of total loans).  However, these banks trail the larger banks in terms of small business loan growth, and will need to reposition themselves (in areas like personal service and local presence) to capture a good share of any continued recovery in small business lending.

  • The 20 banks with the largest small business loan portfolios grew their small business lending 4% y/y in 1Q13.  Banks with above-average growth included:
    • Ally (+44%)
    • Wintrust (+14%)
    • Huntington (+11%): has focused internal resources by making business loan commitments, as well as deploying additional small business bankers.
    • TCF Bank (+11%)
    • American Express (+9%): built on small business card lending.

See a recent EMI blog for examples of banks that are effectively marketing to their commercial banking clients and prospects.