Loan Demand Is Disappointing at Midtier Banks

The road back to loan growth is looking longer than some midsize banks had anticipated.

Banks that do business from California to New York said Wednesday that static business borrowing last quarter has dampened hopes that loan demand could pick up by as soon as yearend.

Executives with M&T Bank Corp., U.S. Bancorp, Comerica Inc., and even a savings and loan that primarily makes mortgages, Hudson City Bancorp., said business lending may take longer to rebound than a lot of bankers — and market watchers — thought earlier in the year.

In discussing second-quarter results, bankers expressed frustration, resignation and even some desperation over that fact that businesses aren't borrowing more, despite promising signs in the first three months of the year that they might need credit sooner rather than later. Manufacturers, services companies and other business borrowers are far healthier than they were a year ago and bank engagements with new customers are up as they poach business from hobbled competitors.

But utilization rates haven't really budged in the first six months of the year.

"It's not as if we actually see much of a drop in demand … it just hasn't gotten any better," said Rene Jones, the chief financial officer of M&T, which is based in Buffalo. "It makes me think it could be some time before we get a noticeable turn in loan demand."

Jones said that in the early part of the year M&T — which has 750 branches from New York to Virginia — had cautiously anticipated demand returning by yearend as it established more relationships and customers reported better profits. But that hope wasn't really reinforced in the second quarter: profits rose as credit costs fell to their lowest level in at least two years.

"Companies are healthy. But it's anyone's guess as to when they'll feel more comfortable" borrowing, Jones said. "Maybe it is moving in that direction. It's just hard to tell."

Richard K. Davis, chairman and chief executive of U.S. Bancorp, said the Minneapolis lender still hopes that commercial loan utilizations would inch up in 2011. Rates fell slightly last quarter from the prior quarter.

"For godsake I hope it does. Oh my God," Davis said. He said that "90 days ago" the company thought it might have "seen the bottom" in terms of loan demand from corporate and commercial customers by now. "We didn't, and it did get weaker in the last 90 days," he said.

Collyn Bement Gilbert, an analyst with Stifel, Nicolaus & Co., said that just because businesses are healthier doesn't mean they need to start borrowing yet. Corporations have saved up a lot of cash and gotten more efficient at doing more with less through the downturn. So any capital purchases they may need to make in the near future will come out of savings, she said.

"Just because they are coming up for air and feeling a little bit better doesn't mean their borrowing demands are going to increase," Gilbert said.

At Comerica, Chairman and CEO Ralph W. Babb backpedaled from the bullish outlook he gave on lending in April. Comerica, which is based in Dallas and makes business loans all over the country, now expects outstanding loans to hold steady this year after projecting single-digit growth for 2010. Its loan pipeline "is at its highest level in more than two years," Babb said. But borrowers are cautious about turning their interest in a loan into a commitment given the uncertainty in the economy, he said.

"We expect subdued loan demand for a while longer," Babb said. "We're seeing a slowing in the economy in general."

Comerica's first-quarter profit rose from comparable periods on cheaper funding costs and improving credit trends. The company has 436 branches, in Texas, Arizona, California, Florida and other states.

Ronald Hermance, the CEO of Hudson City, in Paramus, N.J., said banks and investors may have had unrealistic optimism for loan growth earlier in the year. Unemployment has remained high while consumers save more and borrow less — conditions that are not favorable for lending.

"Most any company you talk to would say, 'I'm ready to make loans to people that can pay them.' Therefore the demand hasn't been there," Hermance said.

The rocky lending environment has even weighed on his company, which has stayed profitable through the downturn on the strength of its core product: Large, conservatively written mortgages to homeowners in and around New York.

In years past, Hudson City, whose profits narrowed slightly from the prior quarter but were up year over year, has grown its loan book at annual rates of as high as 22%. Last quarter, its lending grew at an annual rate of just 2% to 3%, even as mortgage demand spiked on historically low rates and people rushed to close a deal before the government's homebuyer tax credit expired.

Low rates and stricter standards from the government-sponsored mortgage agencies have made it tougher for his company.