Go where the growth is.
That appears to be the motto of a group of banks that have transformed their loan portfolios. Since the dawn of the recession, these banks have aggressively shifted into commercial and industrial lending, a segment that has powered growth overall since lending began to pull out of its postcrisis slump in 2011. (The following graphic shows data on publicly traded banks that have increased the portion of their loan portfolios made up of C&I loans by at least five percentage points over about the last five years. Text continues below.)
Depending on your point of view, such banks might be pushing into a sector crowded with irrational competitors and flaring with alarms over deteriorating credit standards.
Or they might just be hustling to fill space on balance sheets that would otherwise be occupied with cash and low-yielding securities that weigh down net interest margins.
Broadly, few banks have dramatically reoriented toward business loans, but NIMs at those that did have caught up with those that did not.
Among a group of nearly 900 publicly traded banks for which data is available across all the periods considered here, less than 40% increased the percentages of their loan portfolios devoted to business loans between the end of 2007 one month after the recession officially began and the end of the first quarter this year.
About 80 banks, or 9%, increased their allocations by more than 5 percentage points, and just 23, or 3%, increased their allocations by more than 10 percentage points.
The banks that increased their allocations by more than 5 percentage points had a median net interest margin of 3.56% in the first quarter, a hair above the median 3.54% for everyone else. From 2007 through early 2010, the median NIM at the banks with big increases in business loan allocations had lagged the median NIM among the others by 10 basis points or more.
Low rates have sharply reduced yields on C&I lending, but funding costs have also dropped and spreads on loans remain relatively healthy. There is no straight line between increased allocations to business loans and margins, however, since changes in the mix within a loan portfolio do not necessarily imply rotations away from cash and low-yielding securities.
Reconfigurations toward business loans at some banks are the result of mergers. C&I as a portion of Hancock Holdings (HBHC) total loans jumped about 17 percentage points in the second quarter of 2011 to 25% after it bought Whitney Holding, for instance. (Hancock recently announced that it plans to shutter about a fifth of its branches, trimming its presence in markets where it has a small retail base and converting some of its offices in such areas into business financial centers.)
Others, like Bridge Capital Holdings (BBNK), have simply pressed ahead with organic strategies that focus on business borrowers.
Ultimately, even if competition for commercial loans is intense and growth is hard to find elsewhere, radical changes in a banks business focus seem rare.