Experts in the finance industry have provided evidence that suggests that commercial and industrial (C&I) loans, whilst contributing to the growth of loan books, are lowering the profit margins of US banks.
The US economy has experienced sluggish growth over the course of the economic recovery however C&I loans are a key exception. The rate of loans provided to businesses by US banks has been growing. However competition for said loans has seen steady growth as well.
This increased rate of competition has facilitated lower interest rates and looser terms for borrowers. This suggests that in the short term banks are set to see a drag on the revenue they can produce on the rate of C&I lending growth. In the long term it could be indicative of banks undercharging, considering the nature of the risks they are taking.
A report released by the Federal Reserve last month sheds light on the issue. A senior loan survey undertaken by the Federal Reserve saw a large share of US banks reporting that they had lowered the spread of funds available for large, middle market and small firms.
In addition to this a number of banks also reported that they had acted to ease protections for lenders; this was however mostly limited to large and medium scale firms. When asked to cite the reason for such policy changes, competition from bank or non-bank lenders was cited as critical to the redefining of terms and standards.
Industry authority Moody’s has weighed in on the issue, suggesting that these conditions, which have been in place for some time already, are having a direct impact on revenue.
The rating agency went on to note that of the 12 most sizeable banks it tracks which provided C&I data, C&I loan volumes have seen a surge at every single one. This surge measured 7% in the final quarter of 2013 when compared to the same point in 2012.
However the rating agency went on to note that only a third of those surveyed, Bank of America, KeyCorp, US Bancorp and Regions Financial experienced C&I net interest income growth. However even these saw growth stand at a lesser rate than that of their C&I portfolios.
This suggests that in the short term revenue growth in this area will be slim at best. C&I loan net charge-offs remain weak, standing at 0.26% in the third quarter overall for loans. However banks currently engaging in battle with rivals over C&I loans may find that once credit conditions shift, they were not paid as much as they should have been.