Tag Archives: commercial lending

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.

Commercial Lending Trends in U.S. Banks’ 3Q12 financials

A noteworthy trend among large U.S. banks’ 3Q11 financials has been the significant rise in commercial lending. This continues a trend that has been evident in recent quarters. Of course, the current strong growth follows significant declines in commercial lending in 2008 and 2009 in the wake of the financial crisis.

Some of these banks have boosted overall commercial loan growth rates by targeting specific industry sectors. Comerica generated overall commercial loan growth of 21%, but grew its energy loan portfolio by 62% and its tech and life sciences portfolio by 36%. Other banks are following the industry targeting trend. Huntington recently launched a new energy lending initiative, and Associated Bank established a Healthcare Industry Banking Group.

It is notable, however, that uncertainty regarding the Presidential election and the looming fiscal cliff led to an overall 22 bps decline in y/y commercial loan growth rates between 2Q12 and 3Q12 for the 14 banks in our study, from 13.52% to 13.33%.

Although growth rates are robust, loan utilization rates remain relatively low, which can again be attributed to the economic uncertainty as well as many larger companies being flush with cash. The relatively low utilization rates indicate that commercial loans growth could accelerate once again if and when fiscal issues are resolved and economic confidence increases. And some banks are already seeing improved utilization rates:

  • Comerica’s utilization rate was 48.2% in 3Q12, having hit a low of 44.2% in 1Q11.
  • Regions’ utilization rate grew from 39.8% in 4Q10 to 44.4% in 2Q12.

Even as banks grow commercial lending, charge-off rates continue to decline. EMI’s analysis of charge-off data from 11 leading banks found an average commercial loan charge-off rate of 0.25% in 3Q12, down 29 bps year-over-year, and 11 bps from the previous quarter.

Finally, both low interest rates and increased competition continue to exercise downward pressure on commercial loan yields. Our analysis of yield data from 13 leading U.S. banks found that the average yield in 3Q12 was 3.81%, down 35 bps y/y and 19 bps q/q.

Stellar Commercial Lending Growth for U.S. Banks

An analysis of leading U.S. banks’ first quarter 2012 financial results reveals strong growth across the board in average commercial loan balances. This growth is largely due to the economic recovery following the Great Recession. Of the 14 banks studied, 11 recorded double-digit year-on-year increases in their portfolios.

This growth momentum has been maintained in recent quarters, with all banks reporting growth in average commercial loans between 4Q11 and 1Q12, and five having quarterly growth rates of more than 5%. As with the y/y growth, quarterly growth rates were strongest for PNC (+11%, boosted by the acquisition of RBC Bank) and Key (+7%).

Bank are further boosted by the fact that most reported commercial loan charge-off rates declines over the past year. However, increased competition for commercial loans has led to most banks reporting declines in loan yields over the past year.  PNC’s yield on its commercial, financial industrial loans fell 53 basis points (bps) between 1Q11 and 1Q12.  Other banks with substantial declines in commercial loan yields during this period include SunTrust (-47 bps), U.S. Bank (-42 bps), KeyBank (-55 bps) and BB&T (-31 bps).

Banks expect that commercial loans will continue to grow over the next few quarter (barring an unexpected economic crisis) and are pursuing a number of approaches to grow their commercial franchises.

  • Targeting high-potential segments: A number of banks are focusing on particular industry segments. PNC’s overall commercial growth was driven by strong performance in lending to health care and financial services firms. Comerica’s energy portfolio grew by 62%, and its tech and life sciences portfolio increased by 38%. Banks are also targeting different business-size segments, such as middle markets (Chase grew its middle market loan portfolio 19% y/y).
  • Building commercial deposits and cross-selling commercial clients:  Capital One grew commercial deposits 15% y/y. And when banks bring in these new commercial deposit relationships, they then need to develop effective cross-sell programs. Huntington reported a 33% annualized increase in commercial deposits in 1Q12. It also claimed that 33% of commercial clients had 4+ products in 1Q12, up from 25% in 1Q11.
  • Encouraging commercial clients to increase line utilization. Line utilization declined significantly following the financial crisis, as businesses retrenched. Many banks reported that utilization rates remained relatively low in the most recent quarter, but some banks are seeing some improvement. Regions reported a 45 basis point increase in utilization.