Banks Open Loan Spigot
Banks Open Loan Spigot
By Ruth Simon
Some big U.S. banks are starting to increase their lending to businesses as demand for loans rises and healthier banks seek to grab customers from weaker rivals. After declining steadily for most of the past two years, the amount of commercial and industrial loans held by commercial banks inched upward during the past two months, according to the Federal Reserve. Moody's Analytics estimates that commercial and industrial lending in the fourth quarter has grown 0.2% from the third quarter, to $1.22 trillion, the first quarterly increase in two years. Moody's predicts such lending will rise 3% next year.
An uptick in business lending is an optimistic sign for the economy and can help to make the recovery self-sustaining. Such loans likely will be used by businesses to expand their operations, which could lead to new jobs and eventually to increased borrowing and spending by hired workers.
Until recently, a chronic lack of lending to businesses was seen by economists as one of the obstacles to healthy recovery. Commercial and industrial lending "is the last thing that turns in a business cycle," said Mark Zandi, chief economist of Moody's Analytics.
At J.P. Morgan Chase & Co., loans outstanding to "middle-market" companies—those with revenue between $10 million and $500 million—have increased 7% this year, with the sharpest growth in the third and fourth quarters, the bank said. Its lending to small businesses is up more than 40% in 2010.
At U.S. Bancorp, commercial loans outstanding increased 0.7% in the third quarter from the second quarter, the first gain since the end of 2008, and are on pace to increase by twice that amount in the fourth quarter, according to the lender. The Minneapolis-based bank has begun taking "prudently larger positions" in loans from multiple lenders that are being refinanced by existing customers, said Richard Payne, vice chairman for wholesale banking. He said U.S. Bancorp has taken business from competitors that ran into trouble during the credit crisis. Coming off the dramatic lending drop after the crisis struck, these increases are modest. The amount of business loans outstanding remains well below historical levels.
In addition, new activity varies significantly from bank to bank and industry to industry.
Still, the uptick is notable, say banking analysts. Whereas the crisis forced banks to tighten lending standards and focus on restructuring problem loans, "as banks get healthier, they get more rational and reasonable about normal risk taking," said the CEO of J.P. Morgan Chase's commercial bank, Todd Maclin.
Banks, many of which received government rescue funds, have been under pressure to increase lending, though they have faced counter pressures from regulators pushing them to hold more capital.
Lending typically rises toward the end of the year as companies increase inventories, so the recent increase might not be sustained. "The true acid test" will come in early months of 2011, said Richard Ramsden, an analyst with Goldman Sachs Group.
Among businesses expecting to borrow more is Aetna Plywood Inc., a wholesale distributor of wood and composite products that is based in Maywood, Ill., and has $75 million-plus in annual sales. The company recently increased its line of credit with Wells Fargo & Co. by about $8 million, in anticipation of a jump in receivables and inventory and an acquisition that's in the works, according to Larry Rassin, Aetna Plywood's owner and president. The company's sales tumbled during the downturn but picked up in March as retailers began making delayed store improvements. "There is no miracle happening, but a slow progression of continued growth, and we believe that will continue," Mr. Rassin said.
Winston-Salem, N.C.-based BB&T Corp. last year stepped up its focus on larger middle-market and corporate customers and increased its corporate banking staff by 50%, said Tol Broome, chief commercial-credit officer. The result was a 20% increase in loan production in the third quarter.
City National Corp.'s City National Bank, based in Los Angeles, this summer offered to waive certain fees on popular Small Business Administration loans while a renewal of federal waiver of those fees was stalled in Congress. The promotion produced a "meaningful uptick" in SBA lending, said City National President and CEO Russell Goldsmith.
Wells Fargo bankers are telling some customers more credit is available if they need it. A year ago, that message often fell on deaf ears, said Perry Pelos, executive vice president and head of commercial banking. Wells Fargo has seen "some pretty big pops in specific areas, such as asset-based lending and real-estate lending, but it's not across-the-board," said Mr. Pelos, who expects lending to increase next year.
Many companies that survived the downturn are better positioned to borrow after having cut costs and inventories and paid down debt. Companies until recently have been reluctant to tap credit lines. Overall, they tapped 35.05% of available credit lines as of Sept. 30, according to the Federal Deposit Insurance Corp., well below a recent peak of 42.52% two years ago.
But some lenders are seeing a pickup. At Dallas-based Comerica Inc., credit usage during the third quarter rose by nearly a percentage point from the second quarter, to 46%, after having been flat for months.
Bank of America Corp. is witnessing a similar pattern. "We are seeing [usage rates] actually start to grow again for the first time in many quarters," CEO Brian Moynihan told investors this month.
The bank since September has seen a rise in demand from middle-market companies, driven in part by commodities. "Prices are going up; companies need more money to finance increasing levels of inventory and receivables," said Laura Whitley, global commercial products executive. She said demand for credit from the retail sector is also showing some signs of strength.
Credit usage isn't expected to surge anytime soon. Many companies now have lots of cash in hand, said J.P. Morgan Chase's Mr. Maclin. Some also have been locking in fixed-rate debt rather than use variable-rate credit lines.
Even a modest upturn in credit-line usage can have a marked impact on loan growth. For PNC Financial Services Group Inc., where credit use remains soft but has stabilized, a 1% increase in usage rates would translate into $1.3 billion in additional loan balances, PNC said.