Competitive C&I Landscape Could Get Tougher With Goldman

Goldman Sachs Group Inc. might be getting into commercial banking at an inopportune time for other large banks.

Loan growth has been soft in recent quarters, particularly for commercial-and-industrial loans, also known as C&I loans. Indications from the first banks to report first-quarter earnings suggest the trend continued into the start of this year. And pricing has tightened for nearly all types of loans.

If a large, national bank with strong name recognition such as Goldman Sachs enters the space, C&I lending could become even tougher for large regional banks, which often count on the product to drive asset growth.

On April 4, The Wall Street Journal reported that Goldman is getting into commercial banking with the hire of Hari Moorthy from JPMorgan Chase & Co. Goldman Sachs released an internal announcement on the hiring indicating that Moorthy will be head of commercial banking engineering while overseeing corporate cash management and payment solutions. The bank declined to comment further.

Goldman Sachs recently added a way to gather additional deposit funding with its online consumer banking product known as Marcus. As the company builds lines of business that align with more traditional retail banks, the competitive landscape could tighten further.

Brian Klock, an analyst with Keefe Bruyette & Woods, said Goldman Sachs' commercial banking buildout would most affect superregional banks. Those banks have already seen weaker C&I loan growth as the large, universal banks such as JPMorgan have recently been taking bigger portions of the syndicated credits — large loans that are split among several banks. Further, persistently low rates in the capital markets have offered borrowers an attractive alternative to bank financing.

"If Goldman Sachs comes in and tries to be aggressive on building out that team, that could impact pricing," Klock said.

Pricing has already been a sore point for banks. S&P Global Market Intelligence data shows commercial loan spreads declined in February on a year-over-year basis for borrowers across the risk spectrum. And early reports from earnings season suggests the competitive landscape is here to stay.

JPMorgan reported that its commercial banking division posted flat loan growth in the first quarter, with C&I loans down 1% offset by a modest gain in commercial real estate loans.

"C&I, commercial real estate markets, mortgage, across the board there's lot of competition," said JPMorgan CFO Marianne Lake during a media earnings call. "We pay great attention to the competitive landscape writ large, but we feel like we're a relationship business in the commercial bank and a loan is just a part of that."

While analysts acknowledged relationships can drive loan growth, they also said Goldman Sachs could have the ability to put further pressure on C&I loan pricing.

"Any time a new competitor enters the market and has the balance sheet and ability to disrupt that market, it's a risk, particularly with a company with such a well-known name as Goldman Sachs," said Terry McEvoy, an analyst with Stephens Inc. "Expertise is valued and paid for, but a loan is a loan and it can be perceived as a commodity."

Among the top 25 banks by asset size, Bank of America Corp. is the largest C&I lender with a loan balance of $271.36 billion in the 2017 fourth quarter. Contrary to JPMorgan's first-quarter dip in C&I lending, Bank of America's April 16 earnings report showed 5% growth in loan balances for the bank's business segments.

The largest regional bank by C&I lending, PNC Financial Services Group Inc., on April 13 reported that its commercial loans dipped modestly in the first quarter due to a decline in multifamily warehouse financing. PNC's C&I book accounted for 34.7% of its total loans and leases in the 2017 fourth quarter. Other regional banks with significant C&I concentration levels include Fifth Third Bancorp at 39.0% and Comerica Inc. at 54.8%.

The intensely competitive environment could prove to be difficult for Goldman Sachs, too, as it attempts to grab market share among entrenched lenders.

"We'll see how effective they can be," said Michael Rose, an analyst for Raymond James. "It's competitive out there and you're going up against well-established players, but Goldman is Goldman."