For the first time in more than three years, the Federal Deposit Insurance
Corporation is reporting a rise in commercial and industrial loans. Plus, a
new survey by the American Bankers Association and CapitalStream shows 80 percent
of banks expect their mid-market commercial lending to grow by at least 10 percent
in the next year.
The C&I loan news came in the FDIC’s Quarterly Banking Profile, which showed a 3.3 percent earnings gain from second quarter of 2003, to $31.2 billion, down from the record $31.9 billion in the first quarter of 2004.
Record growth in loans drove that rise, the FDIC reported, and while consumer and small-business loans grew faster, the 1.8 percent rise in C&I loans was particularly noteworthy because it followed 13 straight quarters of declines. Commercial real estate loans grew by 2.7 percent, and real estate construction and development loans grew by 4.9 percent. Small-business loans, meanwhile, grew by 3.3 percent.
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The ABA hailed the news as proof of an economic upswing.
“The rapid expansion of business borrowing is hard evidence that the economy is improving,” said James Chessen, the ABA’s chief economist. “Banks stepped up to the plate to meet the demand for loans from businesses last quarter. With plenty of deposits, strong capital backing and few problem loans, banks are poised to meet the growing needs of their business borrowers. Renewed business confidence is at the heart of this strong loan demand.”
And even before the FDIC figures were out, individual banks had clearly noticed the trend – as evidenced by the ABA’s findings in a survey of more than 100 bank executives conducted from March to May.
Respondents said they expected “moderate to strong growth” in middle-market lending, the ABA reported – referring to businesses with sales between $5 million and $75 million, or credit limits of $500,000 to $15 million. The majority of growth, the survey found, is expected to come from commercial real estate, lines of credit and term loans, which make up 90 percent of current origination volume.
“The economic environment is prime for increased commercial lending activity, and the mid-market is one of the fastest-growing segments of the revived commercial lending market,” Chessen said of the survey results.
Oliver Bennett, who has just been named Bank of America’s market executive for middle-market banking in Rhode Island and southeastern Massachusetts, said Bank of America definitely expects its mid-market lending to grow in the coming year, and even faster than in the U.S. banking industry as a whole.
The same holds true in our region, Bennett said. “It’s not as robust as it is in other parts of the country, but I do think it’s very active.”
“I think middle-market lending tends to reflect what’s going on in the overall economy, and when you look at where the economy is nationally, it’s generally going in the right direction,” Bennett said. Lending grows when interest rates are coupled with a growing demand for companies’ products, he said, and that’s happening even here.
“We are seeing our borrowers coming back and asking for increased lines of credit,” he said.
“It’s hard to forecast whether they’ll end up using all the availability we’re giving them … but when the economy is struggling, when borrowers are seeing their sales decline, then they tend to reduce their lines of credit.”
Some other banks active in Rhode Island have also seen growth in their commercial lending: Sovereign’s second-quarter 2004 report showed a 14 percent jump in commercial loan balances over June 2003; the Washington Trust Company reported a 9.7 percent increase in the same period; and Bank Rhode Island reported an 11.4 percent jump in just the six months ending June 30.
But Merrill W. Sherman, president and CEO of Bank Rhode Island, attributed that rapid growth not to an economic turnabout – customers “are still cautious,” and demand for credit is only growing “modestly” – but to BankRI’s strong focus on Rhode Island and on commercial banking and its “relationship-oriented” approach.
Even in a “soft” economy, Sherman said, BankRI has managed to grow its commercial loans by about 20 percent a year. As of July, mid-market lending was growing at an annualized rate of about 28 percent. “Our model was always to take business away from the larger banks,” she said.
