Three regional banks based in different parts of the country reported encouraging trends in business lending this week — an indication that persistent supply-chain problems are being offset by other factors that are buoying commercial loan demand.
Fifth Third Bancorp in Cincinnati, Synovus Financial in Columbus, Georgia, and Zions Bancorporation in Salt Lake City all recorded quarter-over-quarter upticks in key business loan categories after excluding loans they made under the Paycheck Protection Program.
The improvements were generally modest, but they fit into a broader picture of incremental gains in business lending. Commercial loan volumes have generally been weak during the pandemic as many business owners shied away from adding to their indebtedness.
But across the industry, the eight-week moving average for commercial and industrial loan growth, excluding PPP loans, has been positive for the last 18 weeks, analysts at Piper Sandler wrote in a research note published Monday.
The recent weekly data suggests that “this closely watched segment of bank lending has found a bottom and is starting to creep toward a much hoped-for rebound,” the analysts wrote.
That upbeat sentiment jibed with the messages from Fifth Third Chairman and CEO Greg Carmichael and his counterparts at Synovus and Zions.
“We're starting to see, once again, some good momentum out there,” Carmichael told analysts Tuesday.
During the third quarter, Fifth Third reported a 5% increase in commercial loan production compared with the second quarter, making July-September its strongest period since the end of 2019.
Fifth Third said that it has added 419 new commercial customers so far this year, which is more than what it saw in all of 2018 and 2019. The $207.7 billion-asset bank operates mainly in the Midwest and the Southeast.
Compared with the second quarter, commercial and industrial loans, which comprise the majority of Fifth Third’s commercial loan book, increased by 1%, and they climbed by 4% after excluding the impact of Paycheck Protection loans. They remained significantly below last year’s levels.
Fifth Third expects the recent pick-up to continue in the coming months, though labor and supply chain shortages will be a “wildcard,” said President Timothy Spence.
Some hotels, facing a tight labor market, are now only cleaning rooms when guests depart, he said. Meanwhile, one electronics client had “nothing but holes in the walls” because it cannot obtain enough parts to fill orders and rebuild its inventory.
While those factors have discouraged businesses from tapping into their available credit lines, Fifth Third executives still expect a slight uptick during the last three months of 2021 — and further improvement if supply chain shortages abate.
Corporate borrowers have been less likely to tap their available credit lines, but Fifth Third is seeing more demand from middle-market companies, executives said.
Two catalysts are a heightened interest in mergers and an increase in capital expenditures, driven in part by businesses that are looking to replace manual processes with equipment and automation, Spence said.
At Synovus, business lending surged in the third quarter, and robust pipelines point to continued strong growth, executives said. Excluding PPP loans, which are running off banks’ balance sheets as borrowers seek forgiveness under the federal pandemic-relief program, commercial and industrial loans increased sequentially by $602 million.
Kevin Blair, the bank’s president and CEO, said that strong commercial loan production more than offset still-elevated levels of loan payoffs and pay-downs.
“Loan growth was extremely strong for the quarter, as funded commercial loan production increased almost 70% versus the previous quarter,” Blair said Tuesday during a call to discuss third quarter results. “We expect this momentum to carry into the fourth quarter as commercial pipelines remain robust.”
At the $55.5 billion-asset bank, which operates across much of the Southeast U.S., the growth was broad-based. Strong C&I loan demand spanned nearly all sectors, from insurance and health care to construction and manufacturing, according to Blair. Loan pipelines are up 20% from the start of 2021, he said.
“So we're very confident in the production side of the equation,” Blair said.
The higher loan volume helped offset nagging headwinds imposed by low interest rates. Net interest income rose 1% from the prior quarter to $385 million.
Zions, which operates in Texas and throughout much of the West, upgraded its loan growth outlook to “moderately increasing” after seeing an uptick in commercial loans. After excluding PPP loans, its loans grew by $661 million, or 1.4%, versus the prior quarter.
The increase was partly driven by strength in commercial construction loans and in owner-occupied commercial loans. The bank has been advertising special promotional rates in the latter sector.
“It's given all of our bankers something really exciting to talk about during a pretty challenging time,” said Scott McLean, Zions’ president and chief operating officer.
Zions is also seeing increases in larger commercial loans and syndicated deals, though company executives said they will hold firm on internal limits for syndicated loans rather than increase the bank’s risk appetite.
Some big banks also reported improvement in commercial lending during the third quarter. PNC Financial Services Group said last week that its commercial and industrial loans were 9.4% higher during the third quarter than in the same period last year. Wells Fargo reported that C&I loans at the end of the quarter were up 1.7% from a year earlier.
