Big Banks Ramp Up Business Lending
Updated April 16, 2014 8:25 p.m. ET Banks are boosting their lending to businesses, providing fuel for companies to increase spending on workers and equipment as the economy improves.
The rise is being driven both by banks, which are loosening their lending standards, and companies, which are seeking more money, bank executives said.
Earnings results from the six largest U.S. commercial banks by assets, which include J.P. Morgan Chase JPM -0.07% JPMorgan Chase & Co. U.S.: NYSE $55.22 -0.04 -0.07% April 17, 2014 4:00 pm Volume (Delayed 15m) : 17.71M AFTER HOURS $55.17 -0.05 -0.09% April 17, 2014 5:58 pm Volume (Delayed 15m): 249,678 P/E Ratio 13.67 Market Cap $209.16 Billion Dividend Yield 2.75% Rev. per Employee $412,630 04/17/14 LendingClub Raises Capital Val... 04/17/14 HEARD ON THE STREET: Morgan St... 04/17/14 Fixed-Income Results Tied to B... More quote details and news » JPM in Your Value Your Change Short position & Co., Citigroup Inc., C +0.08% Citigroup Inc. U.S.: NYSE $48.22 +0.04 +0.08% April 17, 2014 4:00 pm Volume (Delayed 15m) : 21.27M AFTER HOURS $48.22 0.00 0.00% April 17, 2014 7:15 pm Volume (Delayed 15m): 90,518 P/E Ratio 10.92 Market Cap $146.36 Billion Dividend Yield 0.08% Rev. per Employee $364,900 04/17/14 Banks' Booming Business in Blo... 04/17/14 Fixed-Income Results Tied to B... 04/17/14 MasterCard CEO Ajay Banga's 20... More quote details and news » C in Your Value Your Change Short position Bank of America Corp. BAC +0.12% Bank of America Corp. U.S.: NYSE $16.15 +0.02 +0.12% April 17, 2014 4:00 pm Volume (Delayed 15m) : 91.17M AFTER HOURS $16.14 -0.01 -0.06% April 17, 2014 7:58 pm Volume (Delayed 15m): 13.60M P/E Ratio 17.18 Market Cap $169.82 Billion Dividend Yield 0.25% Rev. per Employee $409,029 04/17/14 Bank of America Swings to Loss... 04/17/14 Fixed-Income Results Tied to B... 04/17/14 Morgan Stanley Client Assets A... More quote details and news » BAC in Your Value Your Change Short position and Wells Fargo & Co., show a 8.3% increase in commercial loans outstanding in the first quarter from the same period a year earlier.
The results suggest companies are getting more confident about the economy after years of sluggish growth, and are anticipating interest rates might start to climb from rock-bottom levels.
Lenders, too, are making bigger bets on an economic expansion at a time when tighter regulatory restrictions on many banking functions have placed more importance on core lending activities to boost earnings.
The increase in commercial lending is helping big banks offset slack demand for mortgages and
other types of consumer loans, which has weighed on overall lending numbers. The six banks posted 2.9% growth in overall lending in the first quarter.
Andrew Cecere, chief financial officer of U.S. Bancorp, USB -0.54% U.S. Bancorp U.S.: NYSE $40.25 -0.22 -0.54% April 17, 2014 4:03 pm Volume (Delayed 15m) : 12.88M AFTER HOURS $40.25 0.00 0.00% April 17, 2014 5:20 pm Volume (Delayed 15m): 165,282 P/E Ratio 13.37 Market Cap $73.66 Billion Dividend Yield 2.29% Rev. per Employee $310,150 04/16/14 Big Banks Ramp Up Business Len... 04/16/14 Stocks to Watch: Abbott Labs, ... 04/16/14 U.S. Bancorp Profit Drops on S... More quote details and news Ă‚Âť USB in Your Value Your Change Short position the fifth-largest U.S. lender by assets, said in an interview Wednesday the bank has seen increased demand for commercial loans from small businesses to midsize companies and large corporations. The Minneapolis bank posted a 9.7% increase in commercial loans outstanding in the quarter, to $113.8 billion, helping to drive a rise in first-quarter net income.
"There's just a general higher level of interest in loan activity and lines of credit," he said.
Banks, meanwhile, are making it easier to borrow. Average rates on new fixed-rate 10-year commercial loans dropped to 3.89% in March from 4.51% in January, according to banking-software and data company Automated Financial Systems Inc.
A January survey of senior bank-loan officers by the Federal Reserve found that 14% of banks had relaxed their standards for commercial and industrial loans to borrowers of all sizes in the fourth quarter. No loan officers reported tightening their standards.
John Daniels, credit-products executive in Bank of America's global commercial-banking unit, said the bank has eased some of its lending requirements in response to the improved financial health of its clients.
"The risk is better," he said. "We're very focused on presenting competitive structures to our clients."
Bank of America, the nation's second-largest U.S. lender by assets, on Wednesday reported an 8.3% increase in commercial lending from a year earlier to $396.83 billion.
Other big banks also reported stronger demand for loans from businesses. For example, Wells Fargo, the fourth-biggest U.S. lender, posted a 5.9% increase in commercial loans outstanding in the quarter to $381.28 billion. The increase was "pretty broad-based," said Perry Pelos, Wells Fargo's head of commercial banking, in an interview Wednesday.
"It wasn't just any one segment that accounted for growth," Mr. Pelos said.
Craig Freedman, chief executive of a Chicago-based company called Freedman Seating Co., which makes seats for public transportation, said he has been borrowing more from Wells Fargo for capital purposes, and is more optimistic about the future than he was last year.
"Our long-term fixed-asset loans have increased and will continue to increase as we bring in more equipment," he said.
Mr. Freedman said he is taking out more loans because of a "desire to grow our business and expand."
Some banks reported that businesses tapped their credit lines to a greater extent in the first quarter, indicating they are more confident about their debt situations or are preparing to spend more on their businesses.
U.S. Bancorp's customers are signaling they are getting ready to tap unused lines of credit and "start getting more lines and loans," said Chief Executive Richard Davis during a conference call on Wednesday.
He noted that the banks' credit-line commitments increased 12% in the first quarter from a year earlier. He attributed the increase to businesses seeking larger credit lines when they renew existing lines.
To be sure, the improvement could reverse if the economy takes a turn for the worse. And while relaxed standards aren't likely to cause banks much trouble in the near future, it was reckless lending that helped fuel the financial crisis.
Bank earnings reports overall continue to be lackluster. The four biggest U.S. banks reported declines in revenue in the first quarter from the same period a year earlier.
Many banks also continue to fight legal battles left over from the financial crisis and are struggling to generate revenue. Bank of America took a $6 billion charge for more legal costs while the investment banks of J.P. Morgan and Citigroup reported a decline in fixed-income trading.
PNC, the sixth-largest U.S. commercial bank by assets, said Wednesday its commercial-loan portfolio increased 9.5% from a year earlier to $120.8 billion in the first quarter, while total loans rose 6.3%.
Chief Executive William Demchak said in a conference call that the bank recently saw "middle market" commercial borrowers increase their use of outstanding credit lines "for the first time in a really long time."
J.P. Morgan's commercial-loan portfolio increased 6.6% from a year earlier to $138.9 billion. The bank saw growth in commercial and industrial loans in markets including Florida and the West Coast, while it noted increased activity in the health-care, oil-and-gas and technology sectors.
PNC said it saw the most growth in the Southeast, while U.S. Bancorp said the West Coast saw the most growth.
According to data from the Federal Deposit Insurance Corp., which tracks lending at all U.S. banks for which it insures deposits, commercial-lending growth hit its most recent peak in the fourth quarter of 2011. Figures for the first quarter of 2014 aren't yet available.
Some banks said the prospect of rising interest rates in the next few years could spur additional growth in commercial lending.
Mr. Davis of U.S. Bancorp said signals from the Federal Reserve that interest rates eventually will rise could spur businesses to increase their borrowing. He said he expects loan growth overall to be stronger in the second half of the year than in the first half.
Mr. Freedman, the Chicago businessman, said low rates were a factor. "Our thought process would certainly be different if interest rates weren't at the level they are at today," he said.
While business borrowing has outpaced consumer borrowing since the recession, commercial lending has become more significant as banks have been hit recently by a slowdown in mortgage activity. Aside from auto lending, most consumer-loan categories have seen little to no growth as borrowers remain cautious about taking on new debt.
"If we're seeing growth, it seems to be pretty much" in commercial categories, said Nancy Bush, an analyst with NAB Research LLC. "The still missing piece is the consumer."
--Vipal Monga and Dan Fitzpatrick contributed to this article.
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