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January 28
The secret to loan growth may be no secret at all: lower rates.
Juxtaposed, U.S. Bancorp and Wells Fargo & Co.'s fourth-quarter reports on Wednesday suggested that the banks most likely to grow their business loans the fastest are the ones that are simply most willing to offer more favorable rates to borrowers.
That correlation, also evident when looking at M&T Bank Corp. and Comerica Inc., supports what bankers and regulators have been saying for months: Loan-pricing wars may be coming back as banks fight for new corporate borrowers in the hopes of selling them other products and services.
"They're competing again. They're competing hard because they want to be able to demonstrate that they are lending," said Christopher B. McDonnell, vice president of Greenwich Associates, a consultant in Greenwich, Conn., who advises banks and businesses on lending matters. "There is absolutely a connection between the most successful [loan] sales and the lowest price."
"It's not a one-to-one correlation," he added. But business owners "are absolutely looking at pricing, when they are looking to make a switch" to another bank.
Average commercial loans rose quarter-to-quarter by a relatively impressive 2% at Minneapolis-based U.S. Bancorp last quarter as interest rates and yields on those types of loans declined 5 basis points, according to an earnings release.
At Wells Fargo, however, commercial and industrial loans rose a more modest 1.2% as C&I rates went up 14 basis points.
M&T Bank Corp., of Buffalo, N.Y. and Comerica, of Dallas, showed a similar divergence.
Comerica's 2.4% increase in commercial balances accompanied a 4-basis-point reduction in rates.
At M&T, balances only rose about 1.2% as rates rose 10 basis points.
All banks are under enormous pressure to show loan growth, which market watchers view as a barometer of where a bank stands in the competitive landscape. Doing so tells investors and potential customers that a bank is past its problems and open for business.
In the Federal Reserve's quarterly survey of bank loan officers conducted in October, big-bank executives said for the second straight time that they had eased terms and prices on commercial loans due to tougher competition.
Executives at Wells Fargo and U.S. Bancorp, for their part, were reluctant to draw a correlation between lower rates and growing loans in calls with analysts and reporters on Wednesday.
"I think that is a stretch," Howard Atkins, chief financial officer of the $1.26 trillion-asset Wells Fargo, said in an interview. "This is about more customers and deeper relationships. The more important point is we're gaining more new relationships."
Loan demand is still tepid, Atkins said. Utilization rates on commercial credit lines haven't budged. But Wells Fargo is taking a bigger share of a still-frozen market that is showing signs of thawing. Relationship managers are making more loan commitments to existing consumers as well as to those who have come to Wells Fargo from other banks, Atkins said. Sales were up in two-thirds of its 80 different business lines.
"In virtually every single type of product and service that we can provide, we had growth in the quarter," Atkins said. "Our business model is about cross-sell. That is why our revenue growth and earnings growth has been so strong."
Wells Fargo's net income rose 2.2% from the prior quarter, to $3.4 billion.
Profits at U.S. Bancorp, meanwhile, rose 7.3%, to $974 million.
Though CEO Richard K. Davis told analysts that the company may charge more for some products to recoup lost interchange fee revenue, rates and yields on commercial loans fell in the fourth quarter. One analyst asked whether competition was squeezing rates.
Andrew Cecere, U.S. Bancorp's CFO, didn't peg competition as the reason for falling rates.
"While loan spreads are not as strong as they were perhaps six months ago, they are still significantly stronger than they were two years ago," Cecere said in a call with analysts.
"We are seeing some moderation in those loan spreads and new loan originations."
