Months after bemoaning the industrywide slowdown in commercial lending, big banks are singing a remarkably different tune.
Business loans emerged as an unexpected bright spot of conversation during earnings calls Friday, as bankers from the industry’s largest companies praised the steady — but, they insisted, undeniably strong — growth in their portfolios.
Total commercial loans at JPMorgan Chase and PNC Financial Services Group grew by 6% from a year earlier, while the much smaller, $29 billion-asset First Horizon National reported an increase of 13%. Bankers were also quick to note the strong demand in their middle-market operations, a business line in which JPMorgan, in particular, reported nearly double-digit growth.
“It was particularly impressive because it was across the board, including the traditional commercial and middle-market segments where we really haven’t seen a sustained growth for several years,” said William Demchak, CEO and chairman at the $372 billion-asset PNC.
The positive spin on business lending could spell good news for the rest of the industry as more regional banks and Bank of America report their results next week. Granted, banks stocks fell slightly Friday after JPMorgan lowered its 2017 loan growth outlook to 8%, but that move was linked primarily to mortgage prospects that it said were falling short of credit standards.
Still, the pickup in commercial growth — particularly among more niche lending businesses — raised questions about the types of the credits that banks are putting on their books.
Asked about credit quality in JPMorgan’s commercial division, Chief Financial Officer Marianne Lake said that even as the company de-risked its balance sheet after the crisis, it hired new bankers who hit the pavement in their local markets. “This is the fruits of that labor,” she said.
Within JPMorgan’s commercial bank — a division that includes corporate, real estate and middle-market lending — loans increased 12% from a year earlier to $197.6 billion. The set-aside for loan losses within the division dipped 8%, to about $3 billion.
The steady pace of commercial lending growth was just one piece of an otherwise solid quarter for big banks. Strong revenue growth in areas such as asset management and credit cards, for instance, offset declines in other businesses, such as fixed-income trading and mortgage banking.
Overall, total commercial loans at JPMorgan grew 6% from a year earlier to $403 billion. Citigroup saw business loans rise 4%, to $319 billion. Wells Fargo, meanwhile, reported a 2% increase, to $505.9 billion.
In some ways, the positive spin on commercial loans marks a shift in perspective. During first-quarter calls, bankers attributed the slowdown in business lending, in part, to gridlock in Washington. Nothing has changed much in that regard as Congress continues to debate legislation to repeal Obamacare and has not yet moved on other business-friendly priorities, such as cutting taxes or boosting infrastructure spending.
JPMorgan CEO Jamie Dimon addressed the economic impact of the paralysis in Washington during his bank's quarterly conference call Friday morning.
“We’ve been growing at 1.5% to 2% despite the stupidity and political gridlock because the American business sector is powerful and strong and is going to grow regardless,” Dimon said.
Taken in context, commercial loan growth at big banks still remains well below the double-digit, industrywide average reported as recently as 18 months ago.
Perhaps one reason for the brighter outlook is the investments big banks are making to expand lending to midsize companies, generally defined as those with between $20 million and $500 million in annual revenue.
PNC, for instance, plans to expand corporate and middle-market activity in new markets, such as Dallas, Minneapolis, Kansas City and Houston. In the coming months and years, the Pittsburgh company expects to recruit talent away from its competitors, though Demchak emphasized that acquiring new clients takes time.
“The better clients you want to target are already well-banked,” Demchak said. “We’re going to be patient, we’re going to get to know the communities, we’re going to become part of the communities.”
JPMorgan, meanwhile, has steadily expanded its middle-market division as well, and now has offices in the top 50 cities, according to Dimon, who noted that the company has started offering faster credit approvals and other high-tech client features.
The company’s crisis-era acquisition of Washington Mutual also allowed the company to expand to new markets, Lake said.
Notably, at Wells Fargo, business with various governmental entities drove overall commercial loan growth, suggesting that headlines about states and municipalities severing their ties to the scandal-plagued bank may have been overblown.
Wells agreed in September to pay $190 million to settle charges that roughly 5,300 employees created more than 2 million phony accounts to collect bonus pay.
Despite the overall growth in commercial lending, Wells executives expressed caution about the commercial real estate loan segment, where loan balances declined slightly from the first quarter.
Referring to the commercial real estate market, CFO John Shrewsberry told analysts: “We have remained disciplined in adhering to our underwriting standards in a competitive market.”
At First Horizon in Memphis, Tenn., total loans rose 8% to $19.2 billion, thanks to double-digit growth in both commercial and industrial and commercial real estate loans. The company has begun adding bankers with specialties in asset-based lending in major markets across the Southeast, according to Chief Credit Officer Susan Springfield.
“There is much angst about slower C&I and slower loan growth in general across the investment community,” especially in recent weeks, said Christopher Marinac, an analyst at FIG Partners. “But I felt that [First Horizon] had a respectable quarter. … Thus, I worry less about their loan growth than other banks.”