Banks' aggregate commercial and industrial loans declined 5.6% sequentially in the third quarter, the first quarter-on-quarter decline this year. A majority of the decline in loans was led by paydowns of corporate debt and the expiration of Small Business Administration's Paycheck Protection Program.
For the first quarter, there was a sequential increase in the aggregate figure due to massive borrowing from corporates amid the pandemic, and the Paycheck Protection Program was a significant driver of continued growth in the second quarter.
Bank of America Corp. reported a 9.1% quarter-over-quarter decline in C&I loans in the third quarter to $291.88 billion. The other megabanks posted similar declines, with JPMorgan Chase & Co. down 8.5% sequentially, Citigroup Inc. by 10.1% and Wells Fargo & Co. by 10.5%.
"The only other notable point on the balance sheet was the decline in loans driven by customer paydowns," said Paul Donofrio, CFO of Bank of America, during the bank's third-quarter earnings call.
In the C&I loan segment, large banks were not only challenged by paydowns but also by muted loan growth, which many bankers said they expect to persist in the near term. According to Federal Reserve's October survey of senior loan officers, banks reported weak demand for C&I loans, while the demand for credit card loans and auto loans was higher.
JPMorgan expects net loan growth to remain meager in the short term. Bank of America, which recorded a decline in C&I loans both sequentially and from the year-ago period, believes that loan demand will stabilize and recover in the next few quarters.
"Outside of PPP loans where government forgiveness will drive declines, we remain optimistic that the larger loan declines of the past couple of quarters are behind us, absent a resurgence in COVID cases further impacting the economy," Donofrio said.
Among the top 25 banks with the most C&I loans, only American Express Co. and MUFG Americas Holdings Corp. posted a linked-quarter increase.
Going forward, bankers expect paydowns and forgiveness of Small Business Administration's Paycheck Protection Program loans to further shrink balances.
"I would say to you that we do expect future headwinds. With regard to the PPP loans, we have about $12.5 billion there. That will begin to pay off as we head into the fourth and the first and probably the second. Loan growth is really challenging now, obviously, that banks are a reflection of the economy," said Kelly King, chairman and CEO of Truist Financial Corp.
On the delinquency front, the aggregate rate stood at 1.31% for C&I loans, up 16 basis points from the year-ago period. Goldman Sachs Group Inc. posted the largest year-over-year increase in delinquency at 365 basis points.
