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C&I loans pop in Q1 but start to run off with capital markets wide open

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C&I loans pop in Q1 but start to run off with capital markets wide open

Commercial-and-industrial loans owned by banks spiked in the first quarter, but the jump appears to be short-lived as bankers have recently reported C&I run-off.

Banks' C&I loans, in aggregate, increased 15.4% year over year in the first quarter to $2.54 trillion. During the first-quarter earnings season, bankers reported the jump was largely driven by corporate borrowers utilizing lines of credit to build war chests as the COVID-19 pandemic tipped the U.S. economy into recession. However, weekly data released by the Federal Reserve shows that C&I loans have declined in recent weeks, matching commentary from some bankers that line draws have largely stopped. In some cases, borrowers have started paying down their lines.

"Some of the lines are getting paid down," said Gary Tenner, an analyst with D.A. Davidson. "The big draw-down activity occurred in the first quarter, and they're stable or even lower in the second quarter."

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The Federal Reserve's H.8 data has recently shown week-over-week declines in C&I loans, especially among the top 25 largest banks. The Fed in its June 5 report, which has data through the week ended May 27, showed an $11.2 billion decline in total loans, driven by a $13.8 billion decline in C&I loans offset by gains in credit card loans and other categories. Analysts at Keefe Bruyette & Woods reported that "core C&I," a measure that excludes wholesale loans, was down even more, with a $24.0 billion decline from the previous week.

Bank of America Corp. reported the most C&I loans in the first quarter, with a balance of $346.43 billion, a 21.2% jump from the year-ago quarter. The four largest banks, each with $1 trillion in assets, similarly dominate the C&I space. Wells Fargo & Co. reported $224.74 billion in C&I loans, followed by JPMorgan Chase & Co. with $222.07 billion and Citigroup Inc. with $205.95 billion in C&I loans. Combined, the four banks own roughly $1 trillion of C&I loans, nearly 40% of the entire banking industry.

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Citigroup CEO Michael Corbat said May 29 at a conference hosted by Sanford C. Bernstein that the first-quarter spike in C&I loans was largely driven by corporate line draws and that a robust capital market has enabled pay-downs of those credit lines in recent weeks.

"What we've seen is the capital markets really wide open and running at, in many cases, unprecedented volumes in terms of new issuance," Corbat said, according to a transcript. "And so we've seen a lot of those companies as opposed to drawing on lines or taking advantage of government facilities actually out raising significant monies."

Banks themselves have been beneficiaries of the robust capital markets. In May, depositories raised more money through debt and equity markets than they did in any single month since May 2009, near the height of the Great Financial Crisis.

On the delinquency front, C&I loans held up in the first quarter with a delinquency rate of 1.16%, up 7 basis points from the linked quarter but down 1 basis point from the year-ago period. Goldman Sachs Group Inc. reported the largest year-over-year jump with an increase of 126 basis points. But with an unprecedented government-funded stimulus effort as the pandemic triggered shutdown orders and widespread forbearance programs, many expect credit deterioration to emerge later in the year.

"We're not out of the woods yet," Tenner said. "I think it's late this year or early 2021 until we start seeing the charge-off activity. And then what sort of a tail that has will be the question."

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