By Peter Rudegeair
(Reuters) - Regional banks including US Bancorp
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
"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
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.
"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.
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)