Commercial Loan Growth Is Real Now; So Are the Risks

Tighter margins. Higher provisions. In some cases, caution signs on credit.

The momentum in commercial lending had plenty of excuses to slow down, yet it maintained a brisk pace in the second quarter.

Quarterly results are still coming in, but commercial lending has exceeded expectations at several large banks — just as it has in so many quarters since the financial crisis.

Average commercial loan growth was 7% compared with a year earlier among a handful of regionals — Citizens Financial, KeyCorp, SunTrust Banks, Regions Financial, BB&T, PNC Financial Services Group and Fifth Third Bancorp — that reported earnings since late last week.

But the source of growth seems to be shifting. Much of it came from existing customers, who are using their credit lines more liberally than in the past, said Terry McEvoy, an analyst at the investment bank Stephens. The increasing use of credit lines could point to optimism about the economy, he said.

"A year ago, [commercial lending] growth was coming from a market-share gains and the movement of customers, and we were not seeing line utilization in current customers expanding like this," he said.

Even Fifth Third, which had one of the lower rates of commercial growth among the regionals that have reported so far, sees commercial as the key growth sector going forward.

"Right now, commercial and industrial will dominate our loan growth," Tayfun Tuzun, Fifth Third's chief financial officer, said during a conference call.

Commercial loans at the $142 billion-asset company rose 3.1%, to $46.3 billion, on the quarter. The sector is very competitive, CEO Kevin Kabat said in an interview.

"We've been very pleased with the quality of the loans we're putting on our books," Kabat said. "We're also pleased with our discipline on pricing."

The company is also pushing more heavily into commercial real estate, and commercial construction loans grew by 90%, to $2.7 billion, in the second quarter.

Chief Risk Officer Frank Forrest stressed that are not speculative, and that the company has not forgotten the lessons of the downturn.

"[The loans] are to national builders that we've had a longtime relationship with," Forrest said on a conference call. "We have learned, as other institutions have, our lessons."

Industry observers have long warned about frothiness in certain parts of the commercial loan market, but credit quality remained strong overall in the quarter. However, there were pockets of concern that caused some banks to take action against possible losses.

A focus on larger commercial clients helped Regions Financial in Birmingham, Ala., increase the size of its loan commercial book by 7% from a year earlier, to $44 billion. But management also increased the size of its loan-loss provision by 80%, to $63 million.

"Given where we are in the credit cycle, the large dollar commercial credits in our portfolio and fluctuating commodity prices … volatility in certain credit metrics can be expected," Regions CFO David Turner said during a conference call.

Executives at the $122 billion-asset company said they were committed to making more corporate loans, with Turner calling it "a business that will provide significant revenue opportunities as we talk about shifting the mix of revenue in the company."

For Signature Bank in New York City, credit concerns were concentrated in an unusual niche: taxi-medallion loans. Overall, the $29.9 billion-asset company's average balance of commercial loans in the second quarter rose 35% to $19.7 billion, from a year earlier.

However, it transferred the bulk of its $170 million portfolio of Chicago taxi medallion loans to its watch list, and it is refinancing the loans as troubled debt restructurings. Overall, loans at least 90 days past due increased to $24 million.

CEO Joseph DePaolo said that medallion loans differ from other types of commercial loans because the medallion itself is key to a taxi driver's job.

"With medallions, we call them 'hostage collateral,'" DePaolo said. "What that means is, this is their livelihood. When they give up a medallion, they are not just giving up an asset, they are giving up their job. That's very different from the collateral on another type of loan. That's why we're willing to work with them."

Citizens Financial in Providence, R.I., has focused most of its efforts on consumer banking as splits from its former parent, Royal Bank of Scotland, but it, too, has been riding the wave of commercial loan growth.

In the second quarter, Citizens' commercial loan growth outpaced consumer, 10% to 8%. Retail loans still make up the largest share of the $137 billion-asset company's earning assets — 42%, compared to 36% for commercial and 22% for other investments — but a strong quarter for commercial real estate lending helped narrow the gap.

Citizens' CRE portfolio grew 14% over the year, to $8.2 billion — not quite the 25% growth rate in auto or the 73% growth rate in student loans Citizens reported, but a healthy clip. However, as with many other banks, Citizens' loan yield declined 15 basis points, to 2.72%.

"The commercial market is highly competitive and this is an area where even maintaining yield requires both strong client relationships and strong discipline," CFO Eric Aboaf said. "We've recently added additional pricing analytics to help our bankers take advantage of the price diversion in what can be an opaque market."

Synovus Financial in Columbus, Ga., has focused on specialty commercial business lines, including Small Business Administration, senior housing and medical office financing. The $28.2 billion-asset company reported Tuesday that total loans jumped roughly 5%, to $21.5 billion, and its C&I portfolio grew by 3%, to $10.4 billion. Commercial real estate loans increased more than 6%, to $7.1 billion.

Growth has been solid across its footprint, particularly in Atlanta, Nashville, Tenn., Tampa, Fla., and Jacksonville, Fla., Chairman and CEO Kessel Stelling said during a conference call with analysts. Management expects loan growth to be in the mid single digits for the full year, he added.

Synovus' C&I growth is typical of banks its size, which have turned their focus from longtime specialties, said Jefferson Harralson, an analyst at KBW.

"The smaller mid-cap banks are willing to do larger loans and now that banks like Synovus just aren't just focused on CRE anymore, we are seeing them taking market share away in the C&I space," he said.

Paul Davis and Jackie Stewart contributed to this article.