Consumer credit eases pain of business lending slump

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Bankers can only hope their favorite tonic for the commercial lending slowdown — the retail lending renaissance — keeps its fizz for just a little while longer.

The commercial slowdown is well into its second year, and the level of frustration bankers are expressing about it is on the rise. You could hear it in bankers’ voices this week when they noted that business confidence is high but companies are not funding capital expenditures with bank loans.

“The lack of commercial loan growth demand juxtaposed against the strong economy has been a little counterintuitive,” William Rogers, chairman and CEO of SunTrust, said during the company’s earnings call Friday. Commercial loans at the company sunk 4% from a year earlier.

But lending on the retail side of the business has come through in a pinch, bolstering the loan books of regional banks and driving net interest income with high-yielding credits. Consumer lending at all three regionals that reported Friday — SunTrust Banks, Citizens Financial Group and Regions Financial — increased at a steady clip of 3% to 4%.

There are several reasons for the uptick in retail lending. Regional banks have moved aggressively into unsecured personal loans, launching partnerships with fintech lenders and offering a range of online products. Regionals also have relatively small credit card portfolios, meaning they can more easily market personal loans as debt-consolidation tools.

There is also the fact that credit quality at the moment is nearly pristine, and the consumer “generally remains healthy,” Regions CEO Grayson Hall said during his company’s call Friday, pointing to the growth in its consumer portfolio.

Consumer lending at Birmingham, Ala.-based Regions rose 3% from a year earlier to $30.1 billion, while commercial loans dipped 1%.

Retail lending growth during the first quarter helped ease the pain felt by CEOs who face hard questions about the state of commercial lending.

Matt O’Connor, an analyst at Deutsche Bank Securities, pressed Rogers on the topic during SunTrust’s quarterly call.

“I think we’re all trying to answer the question you’ve asked,” Rogers said in reference to the puzzle the Atlanta bank and its rivals are trying to solve.

Across the industry, commercial and industrial lending rose by an average of 2.4% during the first quarter from a year earlier, according to an April 1 report from Wedbush Securities that cited data from the Federal Reserve.

That is a significant deceleration from the prior year, when C&I loans were rising at a 5.1% pace. During the first quarter of 2016, by comparison, C&I loans increased by 7.3%.

Bruce Van Saun, chairman and CEO of Citizens, said business customers are holding back for a mix of reasons. He said many rushed to lock in ultralow rates last year by refinancing bank loans in the capital markets.

Additionally, the industry likely had unrealistic expectations for the speed at which the corporate tax cuts could spur loan demand. Many businesses are now sitting on a pile of newfound cash thanks to the tax law, and will likely burn through it before deciding to borrow.

“You’re going to go through a bit of a digestion period,” Van Saun said during an interview after Citizens’ quarterly call. “You don’t turn on a dime and start your plans.”

In the coming year, though, business lending is expected to pick up, Van Saun added. Commercial loans at Citizens increased 2% from a year earlier.

In the meantime, Citizens is charging ahead with plans to spur growth in its consumer lending book. Consumer loans at the Providence, R.I., company rose 4% during the first quarter, to $58.3 billion.

During the second quarter, Citizens — an early mover in point-of-sale lending — plans to announce a “very significant” lending partnership with a home security company, Van Saun said. The company currently has a similar point-of-sale arrangement with Vivent, another home security provider.

Citizens also maintains an exclusive agreement to provide interest-free, point-of-sale customers to Apple customers to upgrade their iPhones. Asked about a Wall Street Journal story earlier this year saying that Goldman Sachs was also in talks with Apple to provide iPhone loans, Van Saun said, “We just keep our head down and try to be a good partner, and help them expand the program.”

During Citizens’ call Friday morning, Brad O’Connor, head of consumer lending, said that one way for Citizens to expand its traditional, unsecured personal loan, known as Pearl, would be to attract customers with lower credit scores. The average credit score in that portfolio is 770, according to the company.

“We’ve stayed at the very, very high end of the market,” O’Connor said. “I think there’s opportunity to go, you know, in the credit spectrum there, but at this point we’re sticking to our knitting.”

Van Saun emphasized during the interview that lowering the average credit score on the Pearl product isn’t under serious consideration.

“We’ve been very consistent in staying at the high end of the credit spectrum, not trying to get volume by loosening our credit standards,” Van Saun said. “I don’t want that to change.”

Laura Alix contributed to this article.

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Consumer lending Regional banks Commercial lending Bruce Van Saun William Rogers, Jr Grayson Hall Citizens Financial Regions Bank SunTrust