Bankers and analysts agree that demand for construction loans will slow nationwide this year, but how it will affect overall loan growth is a matter of debate.

Several banking companies' construction lending has grown faster than other business lending in recent years, a report issued on Dec. 21 by KBW Inc.'s Keefe, Bruyette & Woods Inc. said. Construction loans are up 31% at the nation's banking companies since 2003, the report said.

But a report the brokerage firm published six days earlier said slackening residential construction could reduce demand for construction loans overall by 16% in 2007, spelling earnings trouble for some banks.

"The residential side has slowed dramatically," Samuel Todd Maclin, the head of commercial banking at JPMorgan Chase & Co., said Thursday. "We haven't seen that" in commercial construction lending. "But pick a city, I don't see people building office buildings at the same rate" as in recent years.

"As the bloom comes off the rose, there are two issues. One is credit, and secondly, replacement of earnings," Mr. Maclin said, though he is one of several bankers who say the decline probably will not affect loan growth.

Mr. Maclin said that, for one thing, he believes loan growth on the whole will be off this year. He said JPMorgan Chase, which has assets of $1.3 trillion, has deliberately kept its commercial real estate and construction loan portfolio small out of concern about credit quality and weaker growth. Other bankers are more optimistic that they can make up for any shortfall by doing more lending to other businesses.

Though Keefe Bruyette acknowledged that construction loans mostly remain a small part of banks' loan portfolios on average - 5% at large-cap banks and 12% at midcaps - it also noted an overdependence on construction loans at some companies.

"Some large-cap banks have generated a disproportionate amount of their growth in recent years from construction lending," the Dec. 15 report said. For instance, through the first nine months of last year 33.2% of Synovus Financial Corp.'s loans were tied to construction, according to Keefe Bruyette. At Zions Bancorp. the figure was 23.9% and BB&T Corp. it was 20.7%, the firm said.

Several of the companies highlighted in the Dec. 21 report are in the South or Southeast, where a glut of condominium development along the coastlines had analysts concerned about lending to residential developers. Keefe Bruyette does not single out any region, though.

Growth in other loan portfolios can hardly offset the decline in construction lending, Keefe Bruyette analyst Jefferson Harralson said at a press briefing Thursday.

"There's not another natural category to get loan growth" comparable to what construction lending has provided, he said. "We're seeing a decline in one of the most profitable areas."

BB&T's Steve Alexander said his company could look to small-business lending to counter an anticipated shortfall in construction lending.

A construction lending decline "would slow down our interest and fee income," said Mr. Alexander, the head of business loan administration at the $118.5 billion-asset BB&T, "but we find that we get a pretty nice pickup in other areas that will help, or maybe totally offset that."

The Winston-Salem, N.C., company's roughly $8 billion residential construction portfolio is likely to grow less than 10% this year, versus about 15% in 2006 and just over 20% in 2005, Mr. Alexander said Thursday. However, its $3.5 billion commercial construction portfolio should continue to increase at "high single digits," or the same rate as last year, he said.

Mr. Alexander said he expects BB&T's total loans to increase at least as much as in 2006, if not more. Its loan book stood at $81.4 billion on Sept. 30, up 11.5% from a year earlier.

Synovus and Zions are also optimistic that they can withstand developers' reluctance to borrow.

"Over the next year, we would expect construction growth overall to be good, and I classify good as high-single or low-double-digit growth," Mark Holladay, Synovus' chief credit officer, said last week. "We are looking for a decent year."

Synovus, of Columbus, Ga., is becoming less reliant on construction lending and plans to do more commercial and industrial lending, so a drop in demand for construction loans will not be a big blow, Mr. Holladay said.

In mid-2005, commercial real estate loans were 58.7% of Synovus' portfolio and C&I, 25.6%. At the time the company said it wanted to set a goal of 13%-16%-a-year growth in C&I loans within five years. At the end of the third quarter, C&I loans were up 9.2% from a year earlier, to $5.7 billion; the commercial real estate portfolio was up 20.6%, to $15 billion.

Keefe Bruyette's Dec. 21 note said that Synovus' overall lending was up 13.2% through the first nine months of 2006 compared with a year earlier and that construction lending accounted for 61.6% of that growth.

Mr. Holladay said, "We are staying with our good customers, but we are not out there looking to acquire a whole lot" of construction borrowers. Meanwhile, office builders "are showing signs of improvement, so we might wind up doing some office construction as well."

Other banking companies are also counting on C&I to offset a decline in construction lending.

"If you look at our recent loan growth by type, you'll see that it is really driven by C&I growth," Harris Simmons, Zions' chairman and chief executive, said at a conference in November. "Commercial real estate growth remained reasonably strong," but "it has leveled off the last couple of quarters," he said.

Clark Hinckley, Zions' head of investor relations, elaborated last week. "We would expect the overall growth rate" in construction lending "to slow a little bit," he said.

Fifteen percent growth in construction lending is more likely than the 25% growth the $44.7 billion-asset Salt Lake City company experienced when demand for construction loans was at its peak, Mr. Hinckley said. But, "I don't think that will have a large impact" on earnings, he said.

Keefe Bruyette said construction lending growth accounted for 50.3% of overall loan growth at Zions through the first nine months of last year. Commercial and industrial loans were 23.2% of the total, according to Zions' third-quarter earnings filing with the Securities and Exchange Commission.

Kenneth D. Simonson, the chief economist at Associated General Contractors of America, said that residential construction, including home improvement, was about 55% of construction spending in 2005 but that the 2006 tally will probably be 52%.

"There are several hot areas" in commercial construction "including hotel and lodging, hospital construction, everything related to energy and power," Mr. Simonson said.

But it would "take a pretty big jump on the nonresidential side" to make up for the decline in housing construction," he said. "Overall construction spending will probably finish 2006 rising about 8% up from a year earlier, to about $1.2 trillion, he said. "In 2007, I would expect that number to be pretty close to flat."

Though construction lending has been punishing in past credit cycles, bankers and analysts said they doubted the industry's weakness would do much harm in the current cycle.

Citigroup Inc. analysts said in a Dec. 8 research report that they expect "some deterioration" in construction portfolios. But given the relative modest size of such portfolios at most banks, they wrote, "we do not view this as a significant earnings headwind for the industry."

JPMorgan Chase's Mr. Maclin said, "Real estate lending is not as risky a proposition as it was when I got into the business 25 years ago."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.