This week’s earnings calendar will include the latest profit numbers from some of the largest U.S. banks, including Bank of America, JP Morgan Chase and Citigroup. While the fate of U.S. banks is always at the top of every financial executive's mind, lending performance in general and the trajectory of lending activity specifically will be a special focus of market watchers.
That’s because the growth of commercial and industrial (C&I) loans — historically the lifeblood of a CFO looking to build a new plant or open up a new market — have been on a tear over the past year and fueling corporate growth. But many argue the C&I boom is not sustainable.
C&I lending has peaked at $1.7 trillion in May of this year from a 2008 financial crisis low of $1.2 trillion, according the Federal Reserve Bank of St Louis. In addition, the Federal Reserve Board said the whopping $38.3 billion month-over-month increase in C&I lending earlier in 2014 was the largest increase since the financial crisis.
But the boom time for these business loans may be coming to an end as the Fed toughens its interest rate policy and banks experience losses on loans made over the frothy lending period. “[We] expect that there will be some deterioration over the near-to-medium term as interest rates inch higher, particularly for midtier regional and community banks, as they have benefitted from strong C&I loan growth over the recent past,”
said a recent report by Fitch Ratings. “We attribute some of C&I's strong credit performance to the low absolute level of interest rates, which may be enabling some more marginal borrowers to remain current.”
Any pullback on business loans will be a tough pill to swallow for corporate America since funds have been flowing so freely. In fact, every domestic respondent to the Fed’s most recent Senior Loan Officer survey reporting “having eased either standards or terms on C&I loans over the past three months cited more-aggressive competition from other banks or nonbank lenders as an important reason for having done so.”
The canary in the coal mine for financial executives gauging the business loan market will be the large commercial banks reporting earnings this week. All the players, especially JPMorgan and Bank of America, have been building their C&I loans and may signal a pullback on lending, especially since their trading business have already cut into profitability.
One player, Wells Fargo, has already reported earnings but its generally conservative loan underwriting practices may shield it from any pullback. “The primary drivers of Wells Fargo’s business remained strong in the second quarter, with broad-based loan growth, increased deposit balances, and improved credit quality,” said Wells Fargo’s CFO John Shrewsberry in a statement on Thursday.