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For big banks, modest loan growth amid choppy Q1 environment

Thelargest banks in the U.S. collectively eked out loan growth during the firstquarter, with strength in commercial and industrial lending helping to offsetthe effects of seasonal weakness in other areas, broader economic sluggishnessand energy sector doldrums.

Sequentialfirst-quarter median loan growth for the top 10 commercial banks in the countrywas 0.43%, below the 1.25% median for all commercial banks in the country,according to an analysis of regulatory filings by S&P Global MarketIntelligence.

"Wecame through the quarter fine," Scott Siefers, an analyst at Sandler O'Neill & Partners, saidin an interview. "It wasn't great, but you still had growth, and with theenvironment of the first quarter, that's not bad."

Banks, he noted, grappled with economic malaiseduring the first three months of the year. The U.S. Commerce Departmentestimated anemic GDPexpansion of 0.5% during the quarter. The energy sector was under heavy pressurefrom a prolonged slump in low oil and gas prices, forcing many borrowers toscale back on investments and banks to curb lending to the industry. Theagriculture sector also was hurting from low commodity prices, adding pressureon the economy and affecting loan demand.  

But commercial clients elsewhere continued toborrow at decent levels, allowing the top 10 banks to collectively grow C&Iand commercial real estate lending. The big banks posted median sequentialC&I growth of 3.52% and CRE expansion of 2.20%, according to the analysis.

That enabled the group to grow total loansdespite setbacks on the consumer and home equity fronts. Following typicallyhigher spending levels ahead of the holiday season in the 2015 fourth quarter,consumers tend to scale back use of credit in the first quarter. Amid slowactivity in the consumer-driven U.S. economy, the start of 2016 proved noexception, with median consumer lending down 1.60% among the big banks. As forhome equity lending, it was down 2.49%.

On the commercial side, agriculture lending wasoff substantially, more than 10% from the previous quarter at the median, amida drawn-out downturn in crop prices that has crimped loan demand from thatsector.

Wells Fargo & Co.'s experience was, to a degree,emblematic of the big-bank experience. The San Francisco company's bank grewloans more than 3% during the quarter thanks in part to nearly 12% growth inC&I, the analysis found. Wells grew C&I lending organically and viaacquisitions.

But it experienced declines in consumer, homeequity and agriculture lending, among other segments.

And while Wells executives are generallyoptimistic about the U.S. economy gaining some momentum as the year wears onand as consumer activity tends to build in warm-weather months, they do expectheadwinds to persist against business lines tied to low commodity prices.

On energy, in particular, Wells Fargo CFO JohnShrewsberry said during an earnings call that the bank is closely watching forsigns that stress in that business could bleed into other areas of lending,including CRE. "We are also actively monitoring commercial real estateexposure on a loan-by-loan basis in geographies highly correlated to theoil-and-gas industry," he said.

Wellssaid deterioration in its energyloan portfolio is notable. The level of energy loans it labeled"classified" rose to 57% in the first quarter from 38% at the end of2015. That "reflects what's going on with the stress of theborrowers," Shrewsberry said.

The Federal Reserve's April 2016 senior loan officer opinionsurvey found thatU.S. banks tightened lending standards for both C&I and CRE lending duringthe first quarter amid general concerns about credit quality deterioration.

"Credit costs have been near record lowlevels and after eight years into this credit recovery, we fully expect creditcosts will rise in 2016," PeterWinter, an analyst for Sterne Agee CRT, said in a report. While helooks for only a gradual increase in credit expenses, he noted that the Fed'slatest loan officer survey marked the third straight time that bankers reportedtightening underwriting standards for commercial loans.

Over the last three credit cycles, Winterwrote, "when banks tightened underwriting standards for more than twoconsecutive quarters, each time credit costs started rising."

Notably, the loan officer survey did find thatbanks "are seeing a spillover from the energy sector onto the creditquality of loans made to businesses and households in energy dependentstates," Winter noted.

That could affect big banks' ability to furtherexpand lending this year, analysts say.

"There'sa fear that problems in energy will spill over into CRE," Piper Jaffray analyst Brett Rabatin said in aninterview. "If it does, that could be significant, at least in Texas andother areas where oil plays a big role."

That said, he noted that oil prices have recentlyrebounded from per-barrel lows in the $20s earlier this year and have hoveredin the $40s. If oil prices can stay in the $40s, he said, that could providerelief to energy companies and, by extension, prevent criticized asset trends fromworsening substantially for banks this year.

Siefers of Sandler O'Neill agreed.But he added that either way energy is likely to be a drag on banks throughout2016. "I'mhopeful that the worst is behind us," he said, "but that is not to saythat it's just going to go away. The effects of low prices will linger for sometime."

For a detailed loan growth analysis for the top 10 U.S. banks and thrifts as well as U.S. commercial bank aggregates, click here.