US banks report signs of strength in C&I despite 4% drop

Several banks reported encouraging signs of growth in commercial lending even as overall balances continued to decline in the third quarter, in large part due to runoff in Paycheck Protection Program loans.

The banking industry, in aggregate, reported a 4.0% sequential decline in commercial and industrial, or C&I, loans in the third quarter, according to data compiled by S&P Global Market Intelligence. As a percentage of gross loans and leases, C&I loans were down to 20.54%, compared to 21.51% in the second quarter and 23.32% in the year-ago quarter.

Forgiveness of Paycheck Protection Program, or PPP, loans, government-backed emergency loans for small businesses, and elevated paydowns drove the balance sheet shrinkage. However, several bankers said they expect loan growth to return in the near term, pointing to stronger demand, robust pipelines of originations and some improvement in line utilization.

Among the 25 banks with the largest C&I loan balances at the end of the third quarter, only seven reported increases from the second quarter and only six posted year-over-year growth. Signature Bank posted the largest sequential and year-over-year increases, with growth of 18.5% and 78.3%, respectively.

Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co., which together account for approximately 35% of C&I loans in the industry, all recorded C&I loan balances lower than year-ago levels. Citigroup and Wells Fargo, however, posted slight increases in period-end balances compared to June 30 levels.

Excluding PPP loans, however, several banks recorded sequential growth in period-end C&I loan balances. Bank executives said increasing capital expenditures and M&A activity were supporting demand for business loans, and some bankers reported upticks in line utilization by middle-market borrowers unable to access capital markets like their larger peers.

"We are seeing, in our core middle market and C&I book, the beginnings of a little bit of daylight in terms of utilization," said Donald McCree III, Citizens Financial Group Inc. vice chairman and head of commercial banking, during the bank's earnings call.

Vice Chairman and CFO John Woods said line utilization was up around 50 basis points overall but remained "near historic lows." The executive said that Citizens foresees a gradual recovery in coming quarters as some of the issues holding back investments, such as supply chain challenges and labor shortages, resolve.

Citizens believes it is well-positioned to see overall loan growth accelerate in the fourth quarter, with average loans up 2.5% to 3%, excluding PPP loans. Spot loan growth is expected to be up by approximately 4%, excluding PPP loans.

"In commercial, we expect to see growth led by subscription line financing, supporting deal-related activity and asset-backed lending. This loan growth positions us well for 2022 and helps offset the impact from PPP runoff," Woods said.

Loan officers across the industry are reporting stronger demand for C&I loans, especially from large and middle-market firms, according to the latest senior loan officer opinion survey from the Federal Reserve. Loan officers said consumers were citing greater need to finance inventory, accounts receivable and M&A, as well as increased investment in plant or equipment.

U.S. Bancorp reported "relatively strong" middle-market lending pipelines, which should help drive C&I loan growth as PPP forgiveness dissipates. The bank's executives also said there appeared to be opportunity for loan growth in asset-backed securitization type of lending, mortgage warehouse lines and supply chain finance activities.

"Those are all areas that have been of particular strength," said Vice Chairman and CFO Terrance Dolan said during the bank's earnings call. "When we end up looking at kind of middle-market space, we're seeing lots of confidence in terms of customers and relatively strong pipelines."

Meanwhile, credit remains near pristine levels. Delinquencies in C&I loans, which were already near historic lows, declined further during the third quarter. Data compiled by S&P Global Market Intelligence show the aggregate delinquency rate of U.S. banks at 1.03% during the third quarter, compared to 1.06% in the previous quarter and 1.31% in the prior-year period.

Click here for an industry document detailing C&I loan holdings.