Don’t call it a comeback: Commercial lending’s ho-hum rebound

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Shouldn’t that rebound in commercial loan demand have kicked in by now? Or has it?

As the halfway mark of 2018 nears, some bankers said during investor presentations this week that businesses are regaining their appetite for new loans. Federal Reserve lending data seems to bear out that perspective.

But many of them sounded frustrated that loan growth is still lukewarm for such a healthy economy. After all, the corporate income tax cut was supposed to turbocharge demand.

As an example of what’s perplexing bankers, Wells Fargo Chief Financial Officer John Shrewsberry noted some recent surveys of small-business owners that show high levels of optimism. Yet, something is getting lost in translation.

“I hear a lot of hopeful pipeline chatter from our various teams, but I’m sort of looking at what actually hits the books,” Shrewsberry said Wednesday at a Deutsche Bank conference in New York. “It doesn’t seem to be there.”

Bill Demchak, chairman and CEO of PNC Financial Services Group in Pittsburgh, echoed that frustration.

“We’re getting mixed messages,” Demchak said at the same event. “Our most recent small-business survey came back with our most robust outlook since we started doing it. But we’re not actually seeing any of that show up in the broad-based numbers.”

After sluggish commercial-and-industrial loan demand throughout 2017, many banks were optimistic that this year would be different. And to be certain, select signs of life appeared during the first quarter.

Andy Cecere, CEO at U.S. Bancorp, pointed out at the Bernstein Strategic Decisions conference in New York that optimism from small-business owners typically foreshadows an uptick in borrowing. Additionally, within its corporate payments business, U.S. Bancorp has recently observed an uptick in discretionary spending, which is often a leading indicator of demand for business loans, CFO Terry Dolan said.

“I do think there is a lot of activity going on that, in my view, was not going on even a year ago,” said Dolan, who spoke alongside Cecere.

At the 25 largest banks, C&I lending had increased 2.6% this quarter through May 9 compared with the first quarter, according to Fed data compiled by Wedbush Securities. That’s a faster growth rate than the 0.8% rate posted by those banks between the fourth quarter and the first quarter.

But a growth rate of less than 3% is still not where the industry expected to be at this point.

“If you look at overall capital expenditure numbers, they are up kind of high single digits year over year, which is pretty good,” Demchak said. “But it’s not showing up really in loan growth, which you know has been pretty lackluster.”

Bankers have proffered several explanations for the doldrums. One theory is that the December tax cut actually depressed loan demand, rather than stimulated it, because it gave companies that were already flush with cash another boost of liquidity, said Alastair Borthwick, head of global commercial banking at Bank of America. There’s little need to take out new loans if you’ve got the cash for pay for things.

“Corporate America received a tax bonus, and cash flow was already at record levels,” Borthwick said Tuesday at the Deutsche Bank conference. “Having more disposable income may be a good thing for loans, but it may not.”

While C&I loan demand sputters, bankers are relying on other business lines to prop up revenue, including consumer lending and fee-based services.

Citigroup has extended partnerships through at least 2022 with all of its retailers, such as Sears, for cobranded and private-label credit cards. And Citi has pared back the promotional rates it offers to consumers on credit cards, which are an expensive way to gain new customers, CEO Michael Corbat said Wednesday at the Bernstein conference.

“As we’ve built those promo balances, it’s certainly put a crimp in terms of top-line growth,” Corbat said.

PNC has continued to bulk up its consumer lending through an expansion of credit cards and auto lending, both through smartphone applications, as well as jumbo residential mortgages, Demchak said.

Meanwhile, BB&T in Winston-Salem, N.C., last month acquired the insurance business of Regions Financial in Birmingham, Ala. That deal will help BB&T boost its noninterest income, as it now has one of the largest chains of property and casualty insurance agencies in the U.S.

“We were very excited to get that deal,” Chris Henson, chief operating officer, said Wednesday at the Deutsche Bank conference. “With Regions, we’re probably a top 10 kind of broker, which is enough scale to operate effectively.”

As for C&I loan growth, most bankers said they remain optimistic but that patience is a required trait and timelines have had to be adjusted.

“I think there are a number of positive signs that we don’t necessarily see in loan growth in the first and second quarter,” U.S. Bancorp’s Dolan said. “But I think when we’re looking at the second half of the year, we feel more positive.”

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Commercial lending Small business lending Commercial banking U.S. Bank Citigroup PNC Financial Services Group Wells Fargo BB&T Bank of America