Commercial and industrial loans declined in the second quarter across the U.S. banking industry, but many institutions say demand is picking up.
The U.S. banking industry's aggregate C&I loan balance was $2.337 trillion at the end of June, down 4.9% from the linked quarter and 13.3% lower from the prior-year period, according to data compiled by S&P Global Market Intelligence. Loan growth has been a challenge recently, in part because borrowers with loans from the Paycheck Protection Program are applying for forgiveness, causing such loans to roll off banks' balance sheets. Many borrowers are also flush with cash from government stimulus programs and uncertain about the economic recovery, hampering credit line utilization.
At Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co., C&I loans were down more than 10% compared to levels a year ago. On a sequential basis, Citigroup was the only megabank to report C&I loan growth in the second quarter.
During an earnings call, Wells Fargo President and CEO Charles Scharf said excess savings, accommodative capital markets and supply chain disruptions drove another decline in commercial loans during the second quarter, "albeit at a slower pace than the last few quarters."
For Fifth Third Bancorp, commercial loan production in the second quarter was the highest since before the COVID-19 pandemic, with significant improvements in technology, renewable energy and manufacturing sectors. Strong production, however, was once again offset by elevated paydowns and PPP forgiveness, according to a transcript of the bank's earnings call.
"While we continue to retain the customer in their core banking relationship, loan growth remains muted due to the environment," said Chairman and CEO Gregory Carmichael.
Huntington Bancshares Inc. Chairman, President and CEO Stephen Steinour said during an earnings call that labor constraints and wage inflation remain a concern for many of its business customers. On the other hand, the executive said confidence levels are very high and leading economic indicators are positive.
"Many of our customers continue to see record cash flows and profitability, driving unprecedented levels of liquidity, which continue to weigh in on growth in line utilization rates," Steinour said.
PNC Financial Services Group Inc. reported that while loans grew primarily due to the acquisition of BBVA USA Bancshares Inc., PNC did have spot loan growth in its legacy balance sheet for both consumer and C&I. Chairman, President and CEO William Demchak said during an earnings call that PNC saw loan utilization rates stabilize in the corporate and institutional banking business, though absolute levels remain near historic lows.
"While new loan approvals have rebounded, actually the highest level in a couple of years, that's been offset by continued paydowns," Demchak said.
Several banks see signs that commercial clients may be ready to utilize or increase line utilization. The timing of that loan growth, however, is up for debate.
Respondents to the Federal Reserve Board's July senior loan officer opinion survey reported stronger demand for C&I loans to firms of all sizes. In addition, several disclosed a higher number of inquiries from potential borrowers regarding the availability and terms of new credit lines or increases in existing lines. Among the reasons cited by respondents for the stronger demand were increases in customers' needs to finance inventory, accounts receivable, investment in plant or equipment and M&A. The same survey found that during the second quarter, many banks eased standards and terms on C&I loans to firms of all sizes.
Wells Fargo CFO Michael Santomassimo said there are "lots of good conversations" with clients.
"So I think people are really thinking about investments and really are thinking about building inventory levels over the coming quarters. But I think that will take some time before it starts to translate into loan growth," Santomassimo said.
Citizens Financial Group Inc. is well-positioned to see overall loan growth accelerate in the second half and into 2022, particularly given the continued strength it is seeing in mortgage, education refi and auto, said Vice Chairman and CFO John Woods during the second-quarter earnings call.
"In commercial, we expect a slower recovery in utilization rates off historic lows with modest growth over the second half of the year led by asset-backed, subscription lines and deal-related financings," Woods said.
At Fifth Third, commercial lending production trends, pipelines and retention of the client relationship all continue to support the potential for improved loan growth once supply and labor constraints normalize, Carmichael said. "We currently expect our 31% commercial revolver utilization rate to increase 1% by year-end."
Delinquencies in C&I loans, meanwhile, remain near historical lows. Data compiled by S&P Global Market Intelligence show the aggregate delinquency rate of U.S. banks at 1.06% during the second quarter, compared to 1.17% in the previous quarter and 1.27% in the prior-year period.
Click here for an industry document detailing C&I loan holdings.