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

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.

FDIC bank data shows continued C&I–and even some small business–loan growth

This week, the FDIC published end-4Q12 data for all U.S. banks showing that U.S. banks’ commercial and industrial (C&I) loan portfolios rose 12% in the year to end-4Q12.  This marks the sixth consecutive quarter with double-digit y/y growth, although the rate of increase has fallen from a high of 16% in 2Q12.

Banks are increasingly looking to commercial lending as a way to grow their overall business, but they are concerned that the current growth rate can be sustained, in particular given the precarious nature of the U.S. economic recovery.  The following chart shows that the strong growth rates over the past two years has resulted in C&I loan portfolios returning to levels seen just prior to the financial crisis.

The data also shows a market difference in C&I loan portfolio growth performance by different bank-asset classes, with larger banks significantly outperforming those with less than $1 billion in assets.

Although banks’ C&I loan portfolios have recovered strongly in recent years following the financial crisis, small business loan portfolio growth remains elusive.  The FDIC started to report small business loan data in 1Q10, and since then small business loan portfolios have decreased by 10%.  However, there are signs that this period of decline has finally bottomed out, with a y/y increase of 0.4% at the end of 2012.

As with their overall C&I loan portfolios, larger banks–led by banks with $1-$10 billion in assets–reported strongest small business loan portfolio growth, while community banks with less than $100 million in assets saw a 13% y/y decline in their small business loan portfolios.