Pacesetters' Challenge: Converting Commitments to Business Loans

Like any good front-runners, executives at U.S. Bancorp (USB) and Comerica (CMA) are sweating what's ahead.

The two banks are the leaders in loan growth among the handful of large institutions that have reported first-quarter results. On Tuesday their chief executives touted robust pipelines of loan commitments to business borrowers — prospects they could tap to preserve their lending lead.

Yet those same commitments clearly frustrate them. Richard K. Davis, the chairman and chief executive of the $340 billion-asset U.S. Bancorp, was blunt when asked how long it takes to convert a commitment into an outstanding loan.

"Well, currently, forever," Davis said. "In a recession, the reality is I have no idea how long it will take. But what I know is when it happens, it will be amazingly quick."

Comerica Chief Executive Ralph W. Babb Jr. seconded Davis' remarks by saying borrowers are still wary of the economy.

"People are being more cautious," he said in a separate phone call with analysts.

Comerica, a $62 billion-asset company in Dallas, reported that its loan commitments were at their highest level since the third quarter of 2009; yet utilization was 47%. Minneapolis-based U.S. Bancorp reported that customers drew on only a quarter of its $90 billion of commitments in the first quarter.

Still, the commitments are seedlings of good things to come, says Marty Mosby, an analyst with Guggenheim Partners who covers U.S. Bancorp.

"Once we see the economy uptick at all, we will see these commitments lever into the kind of loan growth we haven't seen in a while," Mosby said. "If you're impressed with what they are showing now, just you wait."

Businesses across all sectors are waiting to strike, and the fact that they are taking lines of credit, even if they are not drawing them is a positive, Davis acknowledged.

"They are getting those lines of credit …, they are planning to use them, I suspect, because they are paying for them," Davis said. "The country's business community is much stronger than people think. … We just need that trigger event and I don't see it in the near term, but it surely will happen because it is a cycle."

Andrew Cecere, the vice chairman and chief financial officer of U.S. Bancorp, said in an interview that the company's current loan growth will be eclipsed when that inflection point is reached.

"We've had good growth, but it going to get even better when utilization get back to normal," Cecere said, noting that normal utilization rates would be in the mid-30s. "I wouldn't term this a frustration. It is an opportunity that has not been realized."

Both companies reported strong loan growth. Comerica reported that its loans grew 6.9% year over year to $42.3 billion. U.S. Bancorp reported loan growth of 6.4% to $210.2 billion. The companies were ahead of JPMorgan Chase (JPM) and well ahead of Wells Fargo (WEFC) and Citigroup (NYSE: C). Others large players, such as Bank of America (BAC), are scheduled to report over the next week.

In January, Davis had warned that the first quarter loan growth would not be as robust as the fourth quarter, when the company grew average loans 2.4% from the previous quarter, because of seasonality and a tax advantage extended to borrowers in 2011. That expectation was realized, with average loans only growing 1.5% from the fourth quarter.

Davis said, however, that demand began picking up toward the end of the first quarter.

"Quarter one got stronger as it aged and quarter two is looking at least as good as quarter one — if not with slight biases on the positive side," Davis said. "We are feeling quite positive about the year as it ages and as spring has sprung, we are looking at things looking up pretty nicely."

The growth, Davis said, was coming from "across the board" — ranging from the company's commercial banking business to its consumer credit cards. He added that it was geographically widespread.

"Except for commercial real estate, where we see strengths on the coasts and the larger cities that kind of line the two oceans, we don't see any other distinct geography to note except a nice steady kind of even increase across all business lines across all states where we do business," Davis said. Comerica also reported a similar universal improvement in loan demand.

"We are seeing a very broad-based kind of lift in (borrowing) activity," Lars Anderson, vice chair of Comerica's business bank, said in a conference call with analysts. "There is no particular business or industry that is carrying the day for us."

Demand for credit is up among energy, technology, life sciences and other types of companies, he said.

Matthew Monks contributed to this story.