U.S. banks are stepping up the pace of lending to their corporate clients in a sign of rising confidence in the world’s largest economy following the biggest contraction since 2009.
Commercial and industrial lending has risen $40.2 billion, or 2.38 percent, to $1.73 trillion in the four weeks ended July 2, after rising just 0.2 percent in the prior period, according to Federal Reserve data compiled by Bloomberg. The increase is the biggest since February, and Citigroup Inc. Chief Financial Officer John Gerspach said yesterday that corporate loan growth has been “pretty widespread.”
Growth in loans may provide evidence that the economy is rebounding after shrinking 2.9 percent in the first three months of the year. Signs of stronger growth would support the Fed’s decision to gradually withdraw from its extraordinary stimulus measures this year.
Loan expansion is going to be the “bullish story” for banks, Keefe Bruyette & Woods Inc. Chief Executive Officer Thomas Michaud said yesterday in an interview with Bloomberg Television.
Known in the industry as C&I loans, they are one of the major components of the “loans and leases” that banks report, accounting for 22 percent of the total.
Other borrowings include those secured by real estate and debt extended to individuals such as credit cards. The increase in C&I loans by more than $106 billion in the six months through June was the biggest since the period ended March 2008, Fed data show.
Banks eased their lending policies for C&I loans and commercial real estate loans, while experiencing stronger demand for both types of borrowings in the three months leading up to the Fed’s April survey on senior loan officers at banks.
The value of all loans made by banks increased by about $290 billion this year to $7.7 trillion, the fastest six-month growth period since the end of 2008, Fed data show.
The recent spurt in credit expansion suggests banks are becoming more willing to take on risk after boosting deposits by 41 percent to a record $10.2 trillion since the credit crisis.
“Banks have been sitting on a lot of liquidity for a long time,” Christopher Wolfe, an analyst with Fitch Ratings, said in an interview. “When you take in deposits and invest in low-yielding securities, it’s going to be hard to make it profitable. That is the impetus for banks to find profitable lending opportunities.”
Citigroup reported a 4 percent increase in loans for the second quarter, exceeding the 3 percent increase in deposits, Gerspach said yesterday on a call discussing the New York-based bank’s earnings.
Lending is showing signs of picking up after the ratio of loan-to-deposits at U.S. commercial banks was below 70 percent in the first quarter of 2014. That measure was more than 90 percent in 2007, according to a July 8 report from Raymond James.
“Loans-to-deposits ratios are still relatively low compared to historic levels,” Wolfe said.
The increase in bank lending has prompted warnings from regulators that standards are weakening in some parts of debt markets. Last year, the Fed and the Office of the Comptroller of the Currency told some of the biggest banks to improve underwriting standards for non-investment grade or leveraged, loans.
A meaningful number of U.S. banks also issued loans with longer maturities, putting the lenders at greater “interest-rate risk,” Fitch said in a report yesterday. “Record-low interest rates have made it attractive for borrowers to seek lengthier loans, which even under a slowly rising rate environment will be a headwind,” analysts led by Bain Rumohr wrote in the report.
Loans dated longer than five years as a percentage of total borrowings have risen to 25 percent at the end of the first quarter, up from 18 percent at the end of 2008.
“The competition for good loans is very high right now,” Rumohr said in a telephone interview. “You can see that in C&I lending.”
The Fed has reduced its monthly bond buying to $35 billion from $85 billion in December.
Unemployment has dropped to 6.1 percent, the lowest level since September 2008.
Job gains and an anticipated productivity rebound imply gross domestic product will gain 4.2 percent in the second quarter, bouncing back from its drop-off in the first quarter, Joseph LaVorgna, an economist at Deutsche Bank AG, wrote in a note.
“Strong C&I lending is usually a good precursor to expansion,” Anthony Polini, an analyst at Raymond James, said in a telephone interview. “It does seem more like a ray of light than a clear indicator, but there is hope the economy is starting to accelerate.”