Commercial loan demand — a big driver of profits — is in the dumps. It has been for two years, and there’s no clear sign it will change anytime soon. After growing at a double-digit pace in late 2015, lending to businesses petered out to just below 1% in the first quarter from a year earlier.
At recent industry conferences, big-bank CEOs were asked about their expectations for loan growth in the year ahead. Several noted that business confidence doesn’t square with the downturn in lending. This is worrisome because weak demand can create incentives to start loosening underwriting terms to drum up business. What looks like a reasonable exception for a longtime customer may snowball into a problem loan down the road.
For banks with goals to meet and investors to impress, the temptation to cut corners, even slightly, can be strong. According to a recent report, many bankers have started to succumb to it. In a semiannual report on risk, the Office of the Comptroller of the Currency (OCC) said that commercial credit standards have loosened across the industry. After years of tightening standards, more banks have begun easing up, extending interest-only terms and underwriting loans with higher loan-to-value ratios to customers.
A mix of higher interest rates and lower taxes have helped to offset the impact of dismal commercial lending results in banks’ quarterly earnings. In fact, banks had their most profitable quarter on record during the first three months of the year, according to the Federal Deposit Insurance Corp.
However, big banks have also been forced to grapple with the possibility that commercial lending – the lifeblood for large regionals – may never fully come back. Business lending at small banks, in contrast, has been mostly steady.
Recently, U.S. Bancorp CEO Andy Cecere was asked if the downturn is indicative of a bigger economic shift. Rather than investing in equipment and new buildings, is it possible that companies are investing more in technology, cloud computing and less capital intensive items? “There could be a little of that,” Cecere said. Cecere believes the demand for bank loans is out there – customers have simply deferred making big investments, or taking on bank debt, for the time being.