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 The market does not appear overheated yet, and many banks are still
reluctant to lend to smaller companies with little credit history,
analysts say. But there are early signs of banks loosening the terms
at which they lend, by demanding less interest, and in some cases
making longer-term loans and bigger loans than they would last year
or the year before.
In 2013, Chad Jensen, the chief financial officer at The Cellular
Connection, a U.S. Verizon Wireless retailer with about $700 million
in annual revenue from almost 900 stores in 28 states, was looking
for a loan and a line of credit to finance potential acquisitions
and capital expenditures.
He met with big banks including JPMorgan Chase, Bank of America Corp
<BAC.N> and Wells Fargo & Co <WFC.N>, but chose PNC late last year
because it offered a 30 percent lower rate and understood his
business better, he said. Though the Marion, Indiana-based company
closed the deal with PNC late last year, bankers are still banging
on his door, Jensen said.
"I've gotten a significant influx of calls from all the regional
players," Jensen said.
The competition to land new business loans reflects the pressure
that banks are under to boost profits in a low interest-rate
environment that weighs on their returns.
Business loans are attractive to lenders because they are performing
so well. Loss rates on commercial and industrial loans have fallen
to 0.30 percent across the banking system, near their lowest level
since the Federal Deposit Insurance Corporation started keeping
public data on the issue in 1984 and down from a post-crisis high of
2.72 percent in the fourth quarter of 2009.
Executives at the biggest banks think pricing and other terms are
getting too generous on at least some of these loans.
"We are seeing the ongoing aggressive competitive environment on
both credit terms and pricing, and we'll do every rational and
sensible deal we can do, but we're not going to chase growth at the
expense of discipline," JPMorgan Chase finance chief Marianne Lake
said on an April 11 conference call, when asked about commercial
loan growth.
Regional banks, meanwhile, say they are expanding their corporate
loan books faster.
"We will continue to compete on price and we may be one of those
culprits for why it is more competitive on the margin," US Bancorp
chief executive Richard Davis said on an April 16 conference call
with analysts, adding that the bank is able to do so because its
funding costs are lower than rivals.
Those trends were clear in first quarter results. Wells Fargo and
Bank of America increased their total commercial portfolios by 1.1
percent and 0.1 percent, respectively, while JPMorgan Chase saw its
total commercial and corporate loans decline 0.4 percent.
In contrast, regional banks like US Bancorp <USB.N>, PNC, and
KeyCorp <KEY.N> increased the size of their total commercial loan
portfolios by more than 3 percent compared with the fourth quarter
of 2013.
Representatives for US Bancorp, PNC and KeyCorp declined to comment.
Federal Reserve data show that total commercial and industrial loans
outstanding reached a record $1.69 trillion for the week ended April
16, on a seasonally adjusted basis. The annualized growth rate
spiked to 12.4 percent in the first quarter from 7.2 percent in the
fourth quarter of 2013, well above the roughly 9 percent average
since the financial crisis.
These growth rates are alarming to regulators. The Office of the
Comptroller of the Currency, which regulates many banks with
branches in multiple states, warned in a December report that low
delinquency levels over a prolonged period may spur banks to take
too much risk. The OCC and the Fed also clamping down on the
riskiest loans banks make to companies, namely junk-rated loans.
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"It's really near and dear to us to make sure there's sound
underwriting and that you don't inappropriately weaken your
standards, especially when you're in an increasingly hot market,"
said Thomas Curry, the Comptroller of the Currency, referring to
commercial lending.
"Discipline is important, and that's what we try to emphasize with
our banks," Curry added, speaking at the Reuters Financial
Regulation Summit on Tuesday.
The Fed's quarterly survey of loan officers in January at banks
found that 10 of the 73 banks that responded had "eased somewhat"
their lending standards for large and mid-sized companies. In
January 2012, all banks that responded said they were keeping
standards for these borrowers unchanged.
FEWER LEVERS
In general, regional banks have fewer ways to pursue growth compared
with the biggest banks, which can rely on a wide range of other
businesses like stock and bond underwriting and wealth management.
Net interest income from Bank of America's global banking and
markets units, which contains the majority of its commercial loans,
amounted to 13 percent of the company's total in the first quarter.
In contrast, net interest income from PNC's corporate and
institutional banking segment amounted to 25 percent of the
company's overall revenue in the first quarter.
"Banks have a choice: you can sit on the sidelines and choose not to
compete on price, but that will be at the expense of loan growth,"
said Jennifer Thompson, a bank analyst at Portales Partners in New
York. "Or you can compete on price. Your margins will suffer, but
you get the loan" and possibly deepen the relationship with a given
client by selling more services, Thompson added.
The banks ramping making more commercial loans acknowledge that
profitability is declining.
The average yield in the commercial loan portfolio of KeyCorp, a
regional bank headquartered in Cleveland with about $93 billion of
assets, fell 3.6 percent in the fourth quarter of 2013.
KeyCorp chief executive Beth Mooney said on an April 17 conference
call that "we continue to see loan yields reflecting the competitive
pricing environment."
Bank of America, which says it is being more disciplined than its
competitors, said the average yield on its total commercial
portfolio rose 1.1 percent over the same period.
Pinpointing the specific bank loan portfolios that will experience
the greatest loss is difficult to determine until the economy starts
to deteriorate, analysts said.
"Every single bank will tell you that they're not giving up on
credit standards, and we won't see whether that's true or not until
the next crisis hits," Portales' Thompson said.
(Reporting by Peter Rudegeair; editing by Dan Wilchins and John
Pickering)
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