Banks are counting on this one segment to drive loan growth

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After the lending doldrums of recent years, bank executives hope that a business-friendly environment under the Trump administration will help commercial borrowing sputter back to life in 2025.

Dozens of U.S. banks reported in their fourth-quarter earnings calls this month that a long-desired breakout in borrower demand hadn't yet materialized. But to the extent that the tide begins to turn, analysts say, commercial and industrial lending will likely be the driving force.

"Almost by process of elimination, C&I is going to have to be the category that carries the baton for the industry this year," said Scott Siefers, an analyst at Piper Sandler. 

Credit card borrowing has been robust, mortgage rates are still relatively high, hampering demand, and banks don't expect to build up their commercial real estate exposure after the sector has spent the last couple of years under the microscope, Siefers said. Other areas, like home equity lines of credit, are also starting to rally, he added, but they don't have the heft to move the needle for most banks.

The situation that banks find themselves in — hoping for a spike in borrower demand — isn't so different from a year ago. The difference in 2025 is that there's more certainty about the political and macroeconomic backdrop, Siefers said.

Still, banks aren't relying on their optimism for loan growth in order to meet their projections for profitability this year.

"After having gotten caught off-guard last year by the lack of any robust improvement in demand in the second half of the year, most of the large banks have approached this year with what I would characterize as an abundance of caution," Siefers said. "They're counting on some improvement in loan growth, but it doesn't have to be a hockey stick to get … to their numbers."

For C&I loan growth, the main problem is a lack of borrower demand. Previous fears of a collapse in credit quality have largely dissipated, and banks have generally built their capital bases to solid levels. 

But the scarcity of borrowers is compounded by banks intentionally slowing growth in, or shedding, commercial real estate loans. 

David Turner, chief financial officer at Regions Financial, said during the company's most recent earnings call that based on current pipelines, the bank expects to see a "notable pickup" in C&I lending this year. But Birmingham, Alabama-based Regions is still only projecting 1% annual loan growth, as C&I originations are offset by headwinds in real estate lending, such as insurance prices, still-high interest rates and supplies and construction costs, offset originations, said Regions CEO John Turner.

"Client optimism is improving, and further clarity surrounding tax reform and tariffs is expected to be a catalyst for business activity and lending," John Turner on the earnings call. "As a result, it will probably be the second half of the year before we see the impact filter through to the economy."

Webster Financial in Stamford, Connecticut, has been working to shave down its commercial real estate loan portfolio in recent quarters, and its loan growth in the last year came largely from C&I and residential mortgage originations. Going forward, CEO John Ciulla said the bank, which projected a 4%-5% bump in loans in 2025, will likely begin steadily replacing some of its CRE business, albeit at a slower pace than the additions to its C&I portfolio.

Citizens Financial Group Chief Financial Officer John Woods said the Providence, Rhode Island-based bank's lending mix has shifted further from commercial real estate and auto lending to focus more on C&I and private bank lending. He said muted commercial loan demand and more selective CRE originations will likely continue to hold back loan growth in the start of 2025.

Cleveland-based KeyCorp is expecting a 2%-5% decline in loan growth for 2025 but says it would still be on track for a 20% rise in net interest income. The bank saw stabilization, and even a pickup, in C&I loans in 2024, and it expects commercial lending to grow by 2%-4% this year, said Chief Financial Officer Clark Khayat. 

Key CEO Chris Gorman said he's confident in the bank's "ability to drive commercial loan growth this year," adding that lending pipelines are nearly double those of a year ago. Khayat said pipelines have been strong, but the bank is waiting for that activity to come through to the balance sheet.

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Bryan Jordan, CEO of Memphis, Tennessee-based First Horizon, said that although CRE loan paydowns will likely outweigh the bank's originations in that sector, he's seeing "some hints of people" confident in the economy and jonesing to get real estate projects rolling.

Although analysts and many bank leaders pointed to C&I as the key to any chance at loan growth in 2025, the industry could still be considering other avenues, per a recent study by Cornerstone Advisors. The survey of about 170 senior- or executive-level bankers suggested that lending segments like commercial real estate and mortgage lending could become less radioactive this year.

While the C&I sector topped the list of lending priorities in 2025, commercial real estate tied for first — 60% of respondents to Cornerstone's survey listed each of the two categories as a leading loan focus. The results showed a year-over-year dip for C&I loans and a rise for CRE, which were listed as lending priorities by 67% and 57% of respondents, respectively, in 2024.

Mortgage and refinance-related loans were named as lending priorities by 48% of bankers, after jumping up from 20% in 2023 to 44% in 2024. Home equity loans ticked up from 24% to 30% of respondents' top lending priorities.

On Monday, the Federal Reserve will release its quarterly survey of senior loan officers, which proved more upbeat throughout 2024.

"The way I characterize it so far is the [Fed survey] has been getting less bad," Siefers said. "We've been moving in the right direction, and hopefully we'll continue on this inflection toward a perception of better demand and a perception of tight, but reasonable standards."