Business Borrowing Cooled in 2Q, Still Underpins Loan Growth

A tumultuous period for the world economy appears to have weighed on loan trends in the second quarter as growth in business borrowing slowed and mortgage balances fell.

Still, the increase in commercial and industrial lending appears to have been healthy enough to underpin another expansion in total loans and assets at domestically chartered commercial banks.

If balance sheet levels at June 20, the most recent date available, held through the final ten days of the month, C&I loans would have expanded at an annual rate of 11.6% in the second quarter, or the slowest pace since the second quarter of last year.

Growth of nearly 12% is still healthy, however, and businesses, which have been borrowing even as they maintain unusually high levels of cash, appear to have continued to provide a vital boost to bank balance sheets.

Overall, loans were on course for an annual rate of increase of about 3% during the second quarter, as were total assets.

Meanwhile, portfolios of single-family mortgages were on pace for an annual rate of decline of about 2% as some bankers said that lower rates made holding onto them unappealing. Commercial mortgages also appeared set for an annual rate of decline of 3%, as signs of strengthening real estate markets failed to materialize in aggregate loan volumes.

Deposit levels were relatively tranquil despite the escalating crisis in Europe, headed toward an annual rate of increase of about 5%, well off the 18% pace in the third quarter last year.

(The data here reflects Federal Reserve estimates based on information provided by a sample of banks calibrated to quarterly regulatory reports. The figures are periodically impacted by inflows and outflows resulting from unique events, such as the addition of about $100 billion of assets and liabilities because of thrift conversions that inflated first quarter growth rates.)

In mid-quarter presentations, bank executives continued to identify business borrowing as a bright spot, but said the percentage of credit lines used by commercial clients remains low compared with previous economic expansions.

In June, U.S. Bancorp (USB) Chief Executive Richard Davis said that growth in lines extended by his company had outpaced growth in loan balances by about 10 percentage points. The additional lines generate fees for the company, but drawn amounts would produce a bigger lift to revenues.

BB&T (BBT) CEO Kelly King said his company was taking commercial loan market share from competitors, and that its bridgehead in Texas had opened up large growth opportunities. But he said that competition on pricing and terms was heating up in a way “that might be problematic down the road.”

By contrast, “commercial real estate is beginning to come alive a little bit” as banks near the end of the process of running off bad loans, and there are fewer signs of “irrational pricing” in that market, King said.

In all, Davis predicted that total loans at U.S. Bancorp would grow a bit more than 1.5% in the second quarter from the first quarter, which is “in my mind wholly unacceptable. But in the world that we’re in, I guess it’s good enough.”