It's an old question: should banks sacrifice underwriting standards for the sake of accelerating loan growth?
The official answer is usually no, or not too much, but first-quarter earnings results suggest that many banks are answering "yes" with their actions.
Several regional banks have reported loan growth of 9% to 13% in a period of low rates and tightening margins. But there are some notable exceptions.
M&T Bank in Buffalo, N.Y., reported much-slower commercial loan growth. The average daily balance of its commercial and industrial loans rose 5%, to $19.5 billion. Its average yield on those loans narrowed 16 basis points, to 3.21%, which was not as steep a fall as some others.
The $98 billion-asset M&T Bank seems to be taking a harder line on loan rates and terms than some of its rivals, said Sameer Gokhale, an analyst at Janney Capital Markets. M&T appears to be willing to sacrifice loan growth for the sake of maintaining its credit standards.
"It seems like every other commercial lender has been growing at a faster rate" than M&T, Gokhale said. "It's in [M&T's] DNA to be more conservative on underwriting, and this is probably happening at the expense of loan growth. Over time, this is the smarter approach."
M&T argued as much in a Monday conference call to discuss its first-quarter earnings. M&T recently passed on making a $30 million commercial loan in upstate New York because an unnamed competitor offered a rate of 2.14% fixed for 10 years, Chief Financial Officer René Jones said.
"It's not possible for us to make that loan," Jones said. "This is one of the things that makes us very increasingly cautious as we move forward."
Gokhale cautioned that other factors can explain the differences in margins among banks, such as the level of competition in a specific geographic market.
Yet "if you are growing at a rapid clip and your yields are falling, there's a warning flag that you are giving away the business just to generate business," Gokhale said.
Banks with expanding loan books are trying to reassure outsiders that they are balancing aggressiveness and prudence.
At the $190 billion-asset SunTrust Banks in Atlanta, the average daily balance of commercial-and-industrial loans rose 13%, to $65.7 billion, from a year earlier. The average yield on C&I loans fell 59 basis points to 3.15% in the same period.
SunTrust's executives tried to convey to analysts on Monday that they are being diligent in underwriting commercial loans. William Rogers, chairman and chief executive, noted that yields on SunTrust's commercial loans are shrinking and its loan growth is slowing down.
"C&I loan growth, while somewhat slower, was positive and broad-based," Rogers said during a conference call. He also noted that yields on commercial loans were smaller because new loans were added to SunTrust's books at rates lower than existing loans in the portfolio.
The margin compression will continue through the rest of the year, Aleem Gillani, SunTrust's CFO, said during the conference call.
"I would think that kind of a margin decline, two or three basis points a quarter, is about sort of the kind of grind-down that we would continue to see given runoff and new production over the remainder of the year," Gillani said.
SunTrust is tapping the brakes on commercial loan opportunities that do not meet its standards, as competitors drive down rates, Rogers said.
"C&I production yields continued to be pressured and, as such, we reduced growth or sold loans in areas that are not meeting our long-term return hurdles," Rogers said.
However, it remains the case that SunTrust's 13% rate of commercial-loan growth is closer to other regional banks' than M&T's 5% rate.
The average daily balance of commercial-and-industrial loans grew faster at all these institutions than at M&T. At the $94 billion-asset KeyCorp in Cleveland, they rose 12% to $28.3 billion. The $69 billion-asset Comerica in Dallas said they rose 10% to $31 billion. At the $351 billion-asset PNC Financial Services Group, they increased 9% to $97.9 billion.
Those with slower growth rates stick out right now, like the $5 billion-asset Westamerica Bancorp. in San Rafael, Calif.
In the first quarter, Westamerica's average commercial loans increased 3% to $401 million, much slower than the industry average. Its net interest margin fell 40 basis points, to 3.43%.
Westamerica has consciously taken a pass on loans where competitors have offered lower rates, in order to be more flexible to add higher-yielding loans when interest rates rise, David Payne, chairman and CEO, said in September. As a result, its loan-to-deposit ratio has fallen dramatically.
"There are a certain number of deals that are lost as a result of the inflexibility on the length of the repricing," Payne said at the Sept. 16 RBC Capital Markets conference. "But I think it does ultimately leave more flexibility down the road in terms of managing our asset liability."