Credit-line drawdowns have peaked. Will banks get repaid?

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The biggest U.S. banks survived the corporate scramble for cash as the novel coronavirus began to shut down the economy last month.

Now bankers are facing the next question: How will all this new debt issued to large and midsize companies perform heading into a recession?

A total of $231.2 billion was drawn from revolving credit lines across the industry since March 5, the research team at Goldman Sachs said in a note to clients issued earlier this week. The rush caused a spike in first-quarter loan growth at banks.

Bank of America reported $60.3 billion in revolver draws on existing commercial lines in the first quarter, including a $34 billion surge the third week of March. Drawdowns slowed to $4 billion in the week that ended April 3.

"Imagine the speed and capacity that our team [showed] to absorb the requests so quickly and get them funded over the course of the quarter," Brian Moynihan, Bank of America's chairman and CEO, said during his company's earnings call Wednesday.

On Tuesday, JPMorgan Chase reported more than $55 billion in revolver credit line draws in March alone, soaring from zero for all of February as the virus began to spread in the U.S. relatively undetected, according to financial documents.

At the $543 billion-asset U.S. Bancorp in Minneapolis, drawdowns on commercial lines peaked during the third and fourth weeks of March, when borrowers took out an additional $22 billion, executives said during a Wednesday call to discuss earnings. Those drawdowns have since slowed, and the company is now expecting line drawdowns to total about $8 billion over the next 90 days, Chief Financial Officer Terry Dolan said in an interview.

U.S. Bancorp’s executives do not have credit quality concerns about those drawdowns, Dolan added.

“The lines were typically from high-quality, investment-grade customers that had commercial paper facilities and needed to have a backstop to those programs in the near term, and/or companies that wanted to increase their liquidity in order to manage through more challenging times,” he said.

PNC Financial Services Group in Pittsburgh, with $445.5 billion in assets, saw a nearly $25 billion increase in commercial lending during the first quarter, driven in large part by credit-line draws.

“Over the last few weeks and into April, we've seen the rate of loan draws normalize,” William Demchak, PNC’s chairman and CEO, said during a Wednesday call with analysts.

The drawdowns PNC handled came across all industries, but Demchak noted that the bank originated $2 billion in new loans for hospitals fighting the COVID-19 outbreak. The company expects loan balances to remain elevated for some time.

Goldman Sachs’ loan portfolio ballooned by 17% from Dec. 31 to $128 billion three months later as commercial clients drew on existing credit lines, the banking giant said Wednesday. Firms that do not have investment-grade ratings were more likely to tap into their credit lines at Goldman than those that do, the company said. Still, Chief Financial Officer Stephen Scherr said the drawdowns were within Goldman’s expectations for a period of economic stress.

There is a concern that credit will eventually tighten as the effects of the economy begin to take hold and other sources of funding dry up.

“You will see a tightening of credit in the market,” JPMorgan Chase Chairman and CEO Jamie Dimon said on the company’s conference call Tuesday. “Think of leveraged lending, certain underwriting, certain nonbank lenders who are no longer there. So you will see an eventual tightening and an eventual increase in spreads.”

U.S. Bancorp and PNC joined their bigger rivals in reporting steep drops in profit as they stockpiled reserves to guard against future defaults on their loans.

U.S. Bancorp reported that its net income fell 31% from a year earlier to $1.2 billion. In addition to low interest rates, the company increased its loan-loss provision by $600 million to account for the potential economic fallout from COVID-19.

The company is not particularly concerned about its own commercial real estate portfolio, Dolan said. But he said he expects some types of properties, such as hotels and retail shops without strong e-commerce abilities, to struggle even after stay-at-home orders begin to ease.

“When we look at the industry broadly, I do think that certainly lodging, hotel and motel sort of properties are going to be more challenged, especially for an extended period of time, as customers have to get back into the swing of being willing to travel,” Dolan said.

“For office space, I think it’s still too early to know,” he added. “Do employees and businesses shift to a higher mix of work from home or not? I think that’s a big question mark.”

PNC’s earnings fell by 28% from a year earlier to $915 million. The company recorded a $914 million loan-loss provision, with 55% of the amount tied to its commercial portfolio.

Executives highlighted $19.3 billion in loans to businesses and commercial real estate properties that have been hurt by the shutdown, led by $4.4 billion in loans to restaurants, casinos, hotels and convention centers — totaling about 1.6% of PNC’s portfolio.

Goldman set aside $937 million for credit losses during the first quarter, representing a sharp increase from $224 million a year earlier.

Goldman offered a forecast Wednesday that was relatively optimistic about when the U.S. economy will start to rebound. But even under that scenario, in which the economy regains about half of its lost output in the second half of 2020, the pain will be immense for many companies.

The company’s exposure to the oil and gas sector, which has been battered by weak demand in recent weeks, is one area of particular focus, Scherr said.

“I think for anybody operating a business, you have to be planning on an assumption that we’re going to be operating in a recession through 2020, into 2021,” Goldman Chairman and CEO David Solomon said during the company’s quarterly earnings call.

Under Goldman’s forecast, U.S. gross domestic product should decline by more than 30% in the second quarter. For the entire year, the New York investment bank expects a contraction of about 6%.

But Solomon acknowledged that economic modeling is particularly difficult at this time, and he said that the current climate creates a lot of uncertainty for business owners.

“We can all have economic forecasts, and we can all talk about the economic consequences,” he said. “But unless people feel safe and secure and confident around the virus, the economic impacts will continue in some way, shape or form. That is a very, very hard thing to predict.”

Solomon said he is giving clients very simple advice.

“I’ve tried to encourage companies that we’ve talked to, and individuals for that matter, to hope for the better but plan for the worse,” he said.

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Commercial lending Earnings PNC Financial Services Group U.S. Bancorp Bank of America Commercial lines Coronavirus
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