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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 Cut Marketing Spending in Absence of Revenue Growth

EMI analyzed bank marketing data of 25 leading U.S. banks and found a 4% y/y decline in marketing expenditure for the first nine months of 2013.  During this period, marketing spending accounted for 2.6% of net revenues.

Our analysis finds that marketing expenditure levels and changes vary significantly by bank type .

  • Monolines: These banks are characterized as having a strong dependence on their credit card operations.  The three banks in this segment—American Express, Discover Financial and Capital One—allocated 7.8% of their revenues to marketing in the first 9 months of 2013.  Capital One’s spend levels are relatively lower, as it has transitioned over the past decade to be more like a full-service bank, with a network of 900+ branches.  The ‘monoline’ segment is also bucking the overall trend, with a 4% y/y rise in marketing spend.

  • National banks: These megabanks invest about 2% of revenues in marketing to promote their brands, support their extensive physical and virtual channels, and advertise their wide array of financial products and services.  As these banks (which include JPMorgan Chase, Wells Fargo, Citigroup and Bank of America) are under pressure to maintain profitability in a low/no growth environment, they reduced marketing spend 8% y/y.  Wells Fargo stands out, insofar as its marketing spend as a percentage of revenues is much lower than its peers, as it has traditionally focused its revenue-generating activities on its branch network.  However, Wells Fargo was the only one of these four national banks to report y/y marketing growth for the first three quarters of 2013.

  • Regional banks: The 18 regional banks analyzed by EMI allocated 1.6% of their revenues to marketing over the first 9 months of 2013.  Under pressure to cut costs and maintain profitability in the absence of revenue growth, these regional banks cut marketing budgets by 13%, led by large regionals like KeyBank (-31%) and SunTrust (-29%).

The extent to which banks ramp their marketing spend will be based on whether they see significant revenue growth opportunities, which in turn is dependent on economic growth.  And there are some positive signs in this regard, with the OECD projecting that U.S. GDP growth will rise from 1.7% in 2013 to 2.9% in 2014 and 3.4% in 2015.

Trends Impacting Credit Card Marketing

A review of various bank and credit card issuer presentations at the recent Barclays Global Financial Services conference revealed a number of trends that could have a significant impact on how credit cards are being marketed.

  • Priority is cross-selling existing customers.  Regional banks that have recently re-acquired their branded credit card portfolios (such as KeyBank and Huntington) are following the lead of Wells Fargo model, in cross-selling credit cards to existing customers (35% of Wells Fargo’s retail households have a Wells Fargo credit card).
    • Regions Bank—which acquired its card portfolio two years ago—reported that its credit card penetration rate is now 13%, and it has ambitions to grow this to 20%.  In addition, even issuers with a national credit card franchise are concentrating efforts on their own customer bases.
    • U.S. Bank is increasingly focused on deepening customer relationships and has increased card penetration to 34%.
    • And Bank of America claimed that 60% of new cards issued in the second quarter of 2013 were to existing customers.
  • The online channel is now the most popular method for new account production.  The popularity of the online channel for new cardholder acquisition is largely driven by its lower cost-per-acquisition relative to other channels, such as direct mail.  It is also a by-product of consumers’ increased comfort with using electronic channels to manage their finances.
    • American Express reported that more than 50% of card acquisition comes through online channels.
    • 71% of Bank of America’s new U.S. consumers credit card accounts came from branch and online channels in 2Q13, compared to 57% in 2Q11.
    • And these examples are consistent with recent data from Chase, who reported in 2Q13 that 53% of credit card accounts were acquired online.
  • Card issuance is growing. 
    • Bank of America claimed that its card issuance is at its highest level since 2008.
    • This mirrors recent data from Experian, which found that overall bank card origination volume (based on credit issued) jumped 21% y/y to $69 billion in 2Q12, the highest level since the fourth quarter of 2008.
  • Credit quality remains strong. Most issuers do not see any significant reversal in the continued downward trajectory in credit card charge-off and delinquency rates.
    • Discover does not envisage significant upward movement in its loss rates over the next 12 months.
    • Chase attributed part of the improvement in its credit-quality metrics to a shift in its customer mix toward higher-income consumers.
  • The competitive battle is centered on rewards.  Although most issuers now offer attractive teaser rates on their main cards, issuers are looking to differentiate and create a competitive advantage through their rewards programs.
    • Discover said that “rewards is the new competitive landscape” and this realization influenced the launch of its Discover It card.
    • U.S. Bank is looking to differentiate by taking its rewards program in-house, claiming that this will enable it improve redemption value, enhance the customer experience and customize rewards.