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Fitch: C&I Loan Growth Slowing While Competition Heats Up

June 01, 2012, 07:30 AM
Filed Under: Banking News

Commercial and industrial (C&I) lending by U.S. financial institutions expanded again in the first quarter, but loan balances are growing at a slower rate as business confidence continues to lag in an uneven economic growth environment and competition among banks in the C&I category remains stiff. Fitch Ratings continues to view C&I lending as a relative bright spot for U.S. banks, but we expect growth rates in 2012 to remain well short of those reported in the second half of last year.

In its quarterly survey of U.S. banks, the FDIC reported on May 25 that C&I loans, along with auto loans, were the only major lending categories where aggregate balances grew in the first quarter. All other major consumer and real estate loan category balances fell.

C&I loans at FDIC-insured commercial banks grew by 2%, or $27 billion, sequentially in first-quarter 12, compared with a stronger 5% quarter-over-quarter growth rate reported in fourth-quarter 2011. Banks' overall loan and lease balances (including both commercial and consumer loans) declined by $56 billion sequentially in the first quarter, breaking a trend of four consecutive quarters in which total U.S. bank lending grew.

The growth rate for C&I lending is falling as banks compete more aggressively for commercial business that offers significant upside in the form of follow-on relationship management opportunities and fees. At a time when persistently low interest rates and tighter loan spreads have cut into profitable lending business across all categories, C&I still stands out as a relatively healthy corner of U.S. banks' balance sheets.

The fall-off in growth during first-quarter 2012 may also have reflected the pull-forward of some lending activity in the second half of 2011 in response to easier underwriting standards.

The Federal Reserve's senior loan officer survey in April indicated that many of the largest banks were loosening standards somewhat on C&I loans, even as demand for the loans picked up. This appears to reflect a fairly aggressive pricing environment that may continue to pressure banks' net interest margin (NIM) performance over the near term.

Despite this competitive pressure, improvements in C&I loan loss performance have continued in early 2012, with notable declines in both net charge offs (NCO) and noncurrent loan balances among banks in the FDIC survey. Total NCOs on C&I loans fell by $1.5 billion, or 44%, in the first quarter versus the year-earlier period, while noncurrent C&I loan balances fell by $6.7 billion, or 30%, over the last year. 

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