Look out below.
That was the clear message that Wells Fargo and Bank of America sent Thursday to their smaller competitors when it comes to commercial and industrial lending.
C&I loans have been a big source of growth for a wide range of banks, but they slowed slightly from the first to second quarters, and predictions for the third quarter are mixed.
As a result, price competition is as intense as ever, especially for loans to midsize commercial customers. Regional and big community banks have complained for a while that big banks are encroaching on their turf, and nothing the big bank said Thursday suggested the trend will end soon.
"Rather than competing on proceeds, or making a risky loan, or rather than just booking low-yielding relationships, we're in a position to be competitive on price, and actually generate good return for shareholders" by cross-selling treasury management and other add-on products, Wells Fargo Chief Financial Officer John Shrewsberry said at Barclays Global Financial Services Conference in New York.
"I would not want to trade places with those smaller banks trying to compete in that environment," Shrewsberry said. "It's hard for them to offer the customer what the customer needs, and as a result, it's hard for them to compete for the extension of credit. I think that's real."
Regional rivals are acknowledging the challenge.
Competition for C&I loans is even higher in the third quarter than it was in the last, Kevin Kabat, the chief executive of Fifth Third Bancorp in Cincinnati, said at the conference.
"I am sure it's going to be more competitive tomorrow than it was today, and we are sensitive to that at this point," he said.
Fears of slowing revenue growth are pressuring lenders to rethink where, and how, they can do the best business.
The Office of the Comptroller of the Currency and the Federal Reserve, which track bank underwriting, have warned about modest loosening of underwriting standards over the past year. The smallest banks with the least diversification may have the least room to maneuver, and are under high pressure from customers and from within to compromise on terms, including covenants, according to Bain Rumohr and Christopher Wolfe at Fitch Ratings.
"For community banks, we are concerned that the smallest ones are stretching on terms and covenants, similar to covenant-lite there are probably some terms being loosened to compete for business," they said in a phone interview. "The reality is this: a community bank can't necessarily compete with larger institutions' products."
Bank of America CFO Bruce Thompson indicated that while revenue growth for commercial lending may be hitting a slowdown, the bank is unwilling to make structural concessions in order to attract business.
"We are willing to compromise a little on price, but not on structure," he said.
Meanwhile, JPMorgan Chase intends to hire 100 commercial bankers over the next 12 months and may utilize its training program as a means to do so, commercial banking CEO Doug Petno told analysts in recent meetings. The bank will concentrate its presence and move away from saturated markets such as California and Florida, according to Jeff Harte, principal at Sandler O'Neill.
Regional and community banks are having to balance the need for an aggressive response to the competitive threat with some restraint to keep from repeating the mistakes of the recent financial crisis.
"Credit spreads are tightening, not giving us or not giving a lot of room relative to making a mistake," Kabat said. "We are very specific with our salesforce about what we are targeting in terms of a risk-adjusted return and where we can get that and where we are comfortable with that."
Wells Fargo's Shrewsberry said big banks have an advantage in the wide range of fee-based products that they can sell.
"We do have all the banking products that middle-market customers could possibly want," he said. "And when you think about the return on the relationship, for the amount of risk we have expended, it's going to be a lot higher if we fully penetrate the relationship, which is what we tend to do."
Total aggregate lending has trickled upwards as unevenly as the economic recovery itself, the OCC noted in its spring semiannual risk report. Large banks have driven commercial loan expansion with consistency, while smaller banks have reported uneven growth.
Kevin Wack and Andy Peters contributed to this article.