Big banks had hoped business lending would gain additional momentum over the summer after a rally in the spring, but third-quarter results are expected to show the comeback was short-lived.
Commercial and industrial lending at the 25 biggest banks fell just under 1% from the second quarter to late in the third quarter, according to data from the Federal Reserve compiled by Wedbush Securities. That was a setback after it rose nearly 3% in the prior three months.
“C&I loan growth has really moderated quite a bit,” said Peter Winter, an analyst with Wedbush, which recently cut earnings estimates on about half of the banks in its coverage area to account for tepid loan growth.
Expect business lending
Analysts cited a number of factors for the linked-quarter decline in commercial loans: Lending typically slows down during the summer months, corporate customers are
Still, the weakness in bank lending does not square with other signs of economic strength. Borrower confidence is strong, credit quality is solid, and
“It’s tough to align the competing factors: the economy is doing well and banks aren’t seeing the growth that they would have expected,” said Scott Siefers, an analyst at Sandler O’Neill.
Analysts typically expect commercial lending to increase on pace with the economy as a whole. During the second quarter, the gross domestic product rose about 4% from the prior quarter, according to the
After nearly
“Nine years into the expansion, there’s an emerging sense that we’re in the later stages of an economic cycle,” Siefers said.
The slowdown is particularly worrisome for regional banks, which rely more heavily on commercial lending than their larger competitors, according to Winter.
At the $369 billion-asset PNC, for instance, commercial loans make up about a third of the company’s total loan book, according to the Federal Deposit Insurance Corp. At JPMorgan, by comparison, commercial loans make up 19% of total loans.
As big banks struggle, though, smaller banks' commercial loan books have been growing at a steady pace.
Excluding the largest 25 banks, commercial loans across the industry rose just over 1% from the second quarter to the third quarter, according to Wedbush.
For the industry as a whole, commercial lending rose 4.7% during the third quarter from a year earlier. That's not anemic, but that figure was boosted by the fact that the year-earlier period provided
Bank executives, for their part, are holding out hope that lending to businesses will rebound at the end of the year, as lending typically picks up during the fourth quarter.
Commercial loans at U.S. Bancorp rose by just under 1% at June 30 compared with the prior quarter, and by about 3% from a year earlier. However, executives at the Minneapolis bank said that corporate customers have begun to draw down their deposits — a possible sign that the demand for bank debt may be just around the corner.
“In the corporate payments space we are seeing the spend by corporate America, which really tells us that they have a lot more confidence in where the economy is going,” Chief Financial Officer Terry Dolan said at a conference in September. “I think the other thing that we have seen is that the deployment of deposits by corporate America has been happening.”