Growth in JPM's Commercial Lending Bodes Well for Other Banks

The performance of the largest U.S. bank's smallest business line may hearten the rest of the banking industry at the kickoff of earnings season.

JPMorgan Chase's commercial banking business reported loans of $150.3 billion in the first quarter, up 3% from the previous quarter and 11% from a year earlier.

What's more, Marianne Lake, the company's chief financial officer, said utilization — the rate at which borrowers are drawing from their existing lines — rose 140 basis points from the fourth quarter and 280 basis points from a year earlier. She did not disclose the exact rates.

Utilization is an important metric for banks because the more it grows, the less pressure they face to find new customers or new loans. Moreover, it is often a harbinger for good economic growth.

Lake told reporters Tuesday that the increase was a tentatively promising sign for the company.

"Utilization was up meaningfully," she said on a conference call. "You have to be a little careful — it can be episodic or seasonal — but it is starting to be a driver for loan growth."

If JPMorgan's experience proves to be universal, expect utilization and commercial loan growth to be a major topic of discussion as regional banks release their first-quarter results. The commercial banking business at JPMorgan targets companies with annual revenues from $20 million to $2 billion, putting it squarely between the small-business market and massive corporate clients.

"For a lot of regionals, this kind of commercial banking is a considerably larger part of the business," said Gerard Cassidy, an analyst with RBC Capital Markets. "So they should show similar trends."

JPMorgan said in a recent investor presentation that its utilization was 32% at Dec. 31., so the improvement cited by Lake would place the utilization rate at more than 33%.

Lake said the rate had reached its highest point since 2009. That said, it must be pointed out that utilization has been exceptionally low since the onset of the financial crisis in 2008.

"We've been waiting for it to pick up, so it is encouraging since it has been sloshing around the bottom since the crisis," said Jeffery Harte, an analyst at Sandler O'Neill. "But it sounds like it is moving in the right direction."

The energy industry, given the volatility of oil and gas prices, may be the exception to the argument that higher utilization signals a better economy, Cassidy said.

"As a general statement, line utilization is a good thing, but the thing that needs to be dug into is how much of this is tied to oil and gas," Cassidy said. "Are customers drawing down their lines of credit to get them through that patch?"

JPMorgan's commercial banking business has already been mildly affected by the oil and gas sector. The company reported a $61 million provision for loan losses in the quarter, compared with $48 million reserve release a quarter earlier. During a call with investors, Lake said that the overall firm added about $100 million to reserves related to oil and gas, with the majority of it in the commercial banking business.

"In the context of a funded portfolio of $15 billion, this is a very modest build and is fully within the range of our expectations at this part of the cycle for energy," Lake said, adding that the company could make a small addition to reserves if low energy prices persist.

Although the volume of commercial loans increased, their impact on the bottom line was considerably smaller. The revenue from the business rose 4% from a year earlier. Meanwhile, the company's overall net interest income was $11 billion, relatively flat from a year earlier.

Yet JPMorgan showed the advantages of being a diversified financial services company. Its corporate and investment bank was the driver of the quarterly results, with its earnings up 19% from a year earlier to $2.5 billion. Overall, the firm reported $5.9 billion, up 12% from a year earlier.

"The highlight for me at JPMorgan is the capital markets business this quarter," said Fred Cannon, the global director of research for Keefe, Bruyette & Woods. "And if you look at both JPMorgan and Wells Fargo, their results show that the basics of banking are still difficult in an industry that gets 70% of their money from spread lending."

The results of $1.45 per share beat the consensus among analysts who had forecast the company would earn $1.39 per share.

That accomplishment, along with lower expenses and an improving efficiency ratio, made for a decidedly more straightforward conference call with analysts. Last quarter, Lake, along with Jamie Dimon, the company's chairman and chief executive, spent nearly as much time defending the viability of the business long-term as they did discussing the previous quarter's earnings. Dimon spoke very little on the call on Tuesday.

"Maybe big banking is boring again?" Cannon said. "They didn't have a big litigation charge, [the stress test] went pretty much true to form, they had good capital markets results and the basics of banking are still challenging," Cannon said. "I'm guessing they don't mind the calm or that the stock is up 2% today."

Its shares were trading at $63.29 late Tuesday, up nearly 2%.