The manufacturing sector is contracting, the U.S.-China trade war is escalating and one-off credit issues are piling up. While the headwinds have some analysts predicting a slowdown in loan growth, bankers reported robust growth and strong pipelines for commercial-and-industrial, or C&I, loans in the second quarter.
Total C&I loans for the banking industry, a broad bucket for loans to businesses, reached $2.21 trillion in the second quarter, up 6.9% from a year earlier. While the annualized growth rate was down slightly from the first quarter, it was still far ahead of the total loan growth rate of 4.5%. Weekly data from the Federal Reserve, known as the H.8 release, show the C&I growth rate was similarly robust in July and August, coming in just below 7% on a year-over-year basis. C&I loans increased by 0.8% on a seasonally adjusted basis from the end of the second quarter through Aug. 21.

During second-quarter earnings calls, bankers who reported particularly strong loan growth largely attributed the performance to solid execution. PNC Financial Services Group Inc. reported a 14.6% year-over-year increase in its C&I portfolio during the second quarter. Executives said the bank's second-quarter loan growth exceeded expectations and that they foresee continued growth in the third quarter. During the bank's July 17 earnings call, Morgan Stanley analyst Betsy Graseck noted there was weakness in manufacturing and asked whether any industry was driving the company's outperformance in loan growth, or if it was propelled by large borrowers as part of the bank's expansion into new markets.
"Most of the new market growth is coming from our traditional middle-market products. It's not differentiated by risk," Chairman, President and CEO William Demchak replied. "The cross-sell ratio in the new markets is accelerating quickly and approaching legacy markets. So we're just executing well ... I don't know how else to explain it. They're doing a good job."

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Analysts do not expect the loan growth trend to continue. Loan growth tends to slow when the Federal Reserve lowers rates, Baird Equity Research analysts wrote in a Sept. 3 note. With one rate cut in July and another widely expected in September, the Fed appears to have entered an easing cycle. Typically, loan growth rates peak three months before a Fed's easing cycle and the loan growth rate drops by half a year later, the analysts wrote. Further, they said the U.S. economy does not appear to be in need of additional debt.
"Even if this is an interest rate head fake and no extended easing cycle follows, 10 years into the economic expansion, we struggle to find parts of the economy that have not significantly re-levered," the analysts wrote.
Fifth Third Bancorp's earnings call highlighted the tension between strong second-quarter results and the gloomy outlook. The bank reported 21.0% year-over-year growth in its C&I loan portfolio, largely driven by its acquisition of MB Financial Inc. But management said the bank generated core growth, too, reporting 7.1% year-over-year growth in C&I loans when excluding the MB Financial deal. While executives said the second-quarter production was solid and its pipelines looked strong, they also said there was a note of caution among its borrower base.
"The conversations are less optimistic," said Chairman, President and CEO Gregory Carmichael. "Obviously with the noise that's out there right now, potential slowing economy, the rate environment, what's happening with the tariffs and so forth, it's just that cautionary discussion."

