Commercial Loan Demand Returns in Latest Index of Banking Activity

Commercial lending made a comeback in December despite concerns about energy prices, helping push the American Banker Index of Banking Activity upward.

The overall index improved to 54.9 in December from 54.6 a month earlier. Though nominal, the monthly increase was the first for the index since June. For the year, the index averaged 56.9, marking a slight, but encouraging, improvement from the 56.7 average for 2013.

An uptick in commercial loan applications followed a surprising November setback. The index for business-loan applications rose to 54.8 in December from 49.7 in November; it had been 56.5in October.

The December reading for approvals of commercial loans accelerated slightly, improving to 55.4 from 53.2 a month earlier.

The results jibed with recent public comments by bankers.

"Loan demand has been very good," David Zalman, the chairman and chief executive of Prosperity Bancshares in Houston, said during a recent call to discuss quarterly results. "We're still producing a lot of business," he said, though Prosperity's loan committee has become "more thoughtful" about its lending.

"We've got a lot of loan growth," Robert Sarver, the chairman and CEO of Western Alliance Bancorp, said during the Phoenix company's earnings call. "We can make good loans at good yields, and we're going to focus more on the deposit side this year."

The collapse in the price of oil, which began accelerating in the fall, made respondents cautious, with several participants calling the situation a wild card. Some optimists said the declines would ultimately benefit consumers and some commercial firms, which again was echoed in quarterly conference calls held this month.

"We'll see softness in … demand, particularly in those sectors related directly to energy," John Hairston, the CEO at Hancock Holding, said during a Jan. 23 conference call to discuss the Gulfport, Miss., company's fourth quarter.

Hancock will also "see some increases in loan demand for industries that typically benefit [from] lower energy prices," Hairston added. "We're already seeing that today — not just in the consumer portfolio, but in the smaller wholesale portfolio."

Consumer loan applications also enjoyed subtle momentum. The reading for applications rose to 53.5 in December from 51.4 in November, while the index for approvals increased to 59.2 from 53.2 a month earlier.

Index of Banking Activity readings above 50 indicate monthly expansion; readings below 50 point to contraction. For contrary indicators, including components that track loan delinquencies and loan-rejection rates, a reading above 50 is evidence of deteriorating business activity. The further from 50 a reading is, the stronger the indicated change.

Lenders continued to cave on pricing to land the best credits. At 47.1, the reading for consumer pricing was the lowest reported since May. The reading for commercial loan pricing, which stood at 47.2 in December, represented a slight decline from a month earlier.

Still, funding loan growth keeps getting cheaper. The reading for consumer and commercial deposit pricing was 49.8 in December, marking the third straight month where banks have had the upper hand.

Bank staffing levels continue to improve, with lenders and fee-generating employees remaining in high demand. The reading for hiring came in at 55.2 in November, showing increased activity for the eighth straight month. Bankers remain relatively optimistic about the economy; the reading for business conditions was 57.5 to close out the year.

"We are making strategic investments … including hiring experienced commercial lenders to drive future growth," Russ Columbo, president and CEO of Bank of Marin in California, said during his company's earnings conference call.

"We're developing a new vertical in our commercial space," Kevin Kabat, CEO of Fifth Third Bancorp in Cincinnati, said during his company's quarterly conference call. "We are hiring. We are also investing in our investment advisory space that has gotten us a good return. We will continue to do that as well as we go forward."

The IBA is a product of American Banker's monthly surveys of bank executives. The latest installment of the diffusion index was based on 332 responses.

The IBA's composite index is a simple average of readings on a range of indicators based on responses to survey questions on topics that include volume and pricing trends in commercial and consumer lending, loan balances outstanding and deposit-account activity.

Respondents are also asked to weigh in on staffing levels at their institutions, as well as business and real estate conditions in markets where they do business. Every effort is made to ensure that the breakdown of companies included in the executive panel is representative of the industry.

The values for individual components of the index are equal to the percentage of responses indicating increased activity plus half of those indicating "no change." Component scores are then averaged to arrive at a composite. When calculating the composite, contrary indicators such as delinquencies are scored inversely — the component figure is subtracted from 100.