It’s been a consistent theme across the banking industry this earnings season: commercial and industrial lending is strong, commercial real estate and consumer lending, not so much.
That’s a far cry from a year ago, when C&I lending was essentially flat — despite predictions that the Trump tax cuts would unleash a wave of business borrowing — and it was CRE and consumer lending driving loan growth.
So what’s changed?
Bankers say that increased demand from middle-market lenders is driving the growth in C&I lending as companies have become more upbeat about the direction of the economy. Facing increasing competition from nonbank lenders, banks have also been loosening credit standards on C&I loans somewhat in order to attract or retain business, according to recent Federal Reserve surveys of loan officers.
At the same time, growth in CRE loans has slowed as early paydowns have accelerated, while weakening demand for home and car loans has slowed consumer loan growth. Some banks are also tapping the brakes a bit on credit card and other consumer lending out of concern that some households may be overextended.
“Consumer lending management teams have been commenting that with perception that we are in the later stages of the credit cycle, they are becoming more careful about lending,” said Christopher Donat, a managing director at Sandler O’Neill & Partners.
The net result for the first quarter of 2019 was that loan growth was muted. In its analysis of publicly traded banks it covers, Sandler O’Neill found that the median increase in loan volume was 3.4% when compared with the prior quarter, well below the 6.2% growth rate analysts had been expected by analysts.
"In terms of loan growth it's been a little bit disappointing," said Alexander Twerdahl, a managing director at Sandler O'Neill.
The Sandler data provides an early snapshot of earnings season trends ahead of a fuller picture that will be provided by Federal Deposit Insurance Corp. numbers next month.
But another indicator leaves little doubt that C&I lending is driving growth — at least for now. Some banks have hinted that the heightened competition from hedge funds and other nonbank lenders could cause them to scale back their C&I lending as the year goes on.
C&I loans increased nearly 10% in the first quarter from one year ago, according to Federal Reserve data released in mid-April, up from a pace of roughly 2% annual growth to start 2018. Meanwhile, CRE loans increased at a 3.9% clip down from 5.6% a year earlier, while consumer loans climbed 4.1% year over year, down from 4.6% in last year’s first quarter.
BB&T in Winston-Salem, N.C., was among the many banks to report strong C&I growth in the first quarter but lackluster loan growth overall. Total loans increased just 1.4% from the prior quarter, largely because the company tapped the brakes on commercial real estate lending.
"Underwriting is really, really very competitive. We are simply not willing to go where some are with regard to CRE underwriting, and so that's why we saw the softness there,” King said on a conference call with analysts.
Two of the nation’s largest banks, U.S. Bancorp and Bank of America, specifically pointed to middle-market lending as the driver of C&I growth. At U.S. Bank, C&I lending climbed 1.3% quarter over the quarter and nearly 5% year over year.
"We saw a nice growth in the middle-market space," U.S. Bancorp Chief Financial Officer Terry Dolan said on the earnings call with analysts. "The economy is solid. Our C&I pipelines are strong at this particular point in time, and businesses continue to spend and make some business investment."
Bank of America reported a 4% commercial loan growth for the quarter, outpacing its consumer business. On an earnings call, Chairman and CEO Brian Moynihan said, "This means middle-market companies are increasing their loan activity as they draw lines to finance raw material purchases, payrolls and other investments.”
At BOK Financial in Tulsa, Okla., much if the demand came from two sectors: health care and energy. The $39.8 billion-asset company reported a 4.2% increase in lending to health care companies over the previous quarter and a 3.2% increase in energy industry loans. The bank's total loan growth for the quarter, however, was just 0.4%, in part because commercial real estate loan balances declined as more customers paid off their loans.
"Our portfolio diversification and specialty lines of business, like energy and health care, is a key differentiator for us and were responsible for the bulk of C&I growth this quarter," Stacy Kymes, BOK’s executive vice president of corporate banking, said during a quarterly call with analysts.
At Capital One Financial in McLean, Va., C&I loans increased 3% in the first quarter when compared with the fourth quarter, while CRE loan growth was flat and balances in its bread-and-butter credit card and auto loan businesses actually declined.
Still, in a conference call with analysts, Chairman and CEO Richard Fairbank said that the company is prepared to scale back its C&I lending if current trends continue.
“Increasing competition from nonbanks continues to drive less favorable terms in the commercial lending marketplace,” Fairbank said. “We’re keeping a watchful eye on market conditions and staying disciplined in our underwriting and origination choices.”
