Unused credit lines pile up on banks' books

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U.S. companies have been letting commercial credit lines at banks pile up unused for years as they held off making big expansion plans and opted to use cash on hand for interim financing needs. Many have had even less reason to borrow since Congress slashed the corporate tax rate in December and put even more cash in companies’ coffers.

The upshot for banks is that unused credit lines are now at their highest level in five years. In the first quarter, unused loan commitments as a percentage of industry assets hit 44%, up from 43% in the same quarter last year and 40.1% in the first quarter of 2013.

Bankers, of course, would like to see companies draw down more of their available credit lines. If lines of credit are sitting unused, banks lose out on potential interest income.

“Most banks first extend the commitment and then hope the borrower draws down the credit line,” said Chris Marinac, an analyst at FIG Partners. “The ongoing issue is the lack of follow-through on borrowed utilization.”

To be sure, the levels of unused credit lines on banks’ books are nowhere near historic highs. Before the Great Recession, when banks were extending credit more freely, it was not unusual for unused loan commitments to climb well above 50% industry assets. In the third quarter of 2006, the ratio hit 65.5%, according to Federal Deposit Insurance Corp. data.

But unused commitments have nevertheless been steadily building for the past six years as companies have stockpiled cash and shifted some of their borrowing to private equity lenders and debt markets.

While some bankers say that they are finally starting to see more clients draw down credit lines, others believe that the levels of unused loan commitments will only increase as companies pocket more savings from the recent tax cut.

“In general, a lot of businesses are doing really well, so they’ve been able to cash flow a lot of their growth without having to tap into their loans,” said Mike Maddox, CEO of the $3.2 billion-asset CrossFirst Bank in Leawood, Kan., which predominantly does commercial lending.

From the first quarter of 2013 through March 31, total unused loan commitments rose 31% to $7.7 trillion, according to FDIC call report figures compiled by BankRegData.

In a measurement of a more recent period, unused commitments rose 5.5% in first quarter from a year earlier. That’s the fastest rate of growth since the first quarter of 2016, said Jason Goldberg, an analyst at Barclays.

Outside of credit card loans, which will always account for the largest chunk of unused credit lines, it is unused commercial and industrial credits that are driving up the numbers. At March 31, C&I loans accounted for 40.3% of unused credit lines, up from 36% in 2013, according to FDIC data.

The $3.9 billion-asset Amarillo National Bank in Texas had $1.1 billion in unused C&I loan commitments at March 31, representing about 93% of total unused commitments.

Many corporate executives like having the backstop of unused credit lines in order to take advantage of a market opportunities. The steadily improving economy combined with the decision to let cash piles accumulate has produced this luxury, Maddox said.

“A lot of times, companies just want that availability because they’re not quite sure what the future holds and they want the ability to act quickly,” Maddox said.

Unused loan commitments at CrossFirst nearly doubled to $1.3 billion in the first quarter from a year earlier. That represented about 40% of the bank’s total assets.

The spike in unused commitments is not all bad news for banks. Commercial borrowers typically pay nonusage fees when a specified period of time has elapsed without drawing down from a credit line, said Lisa Kwasnowski, an analyst at the bond ratings firm DBRS.

And there are signs that C&I lending, which has been lackluster in recent quarters, is picking up, albeit at slower rates than bankers would prefer. Through the first six weeks of this quarter, C&I lending was up 2.6% from the quarter that ended March 31, according to Federal Reserve data compiled by Wedbush Securities.

Some bankers have predicted that the third quarter is when many companies will start drawing on their commercial credit lines.

“We’re seeing C&I pick up quite dramatically, relative to kind of the second-half performance of last year,” Bruce Van Saun, the chairman and CEO of the $158 billion-asset Citizens Financial Group, said at an investor conference on May 31. “We entered [the second quarter] with very strong pipelines and … the pipelines are refilling.”

The $215 billion-asset BB&T expects to record mid-single-digit growth in C&I loans, on a yearly basis, in the second and third quarters, Chief Financial Officer Daryl Bible said on May 15 at an investor conference.

But CrossFirst’s Maddox is not convinced that conditions will improve in the third quarter, which starts July 1. Companies still have plenty of cash and private equity funds remain active in financing commercial firms, so it may take a shift in the economy for companies to really ramp up their borrowing, he said.

“I’m sure there will come a point at which there will be less liquidity and companies will start borrowing more,” Maddox said. “Possibly, if you start seeing more inflation, that will drive some of it.”

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