Three big banks sought Friday to burst fears about a business lending bubble. Top executives with Comerica, Fifth Third Bancorp and U.S. Bancorp assured investors at an RBC Capital Markets conference in Boston that corporate lending remains safe and lucrative.
There are mounting fears that loan-starved banks may be pursuing business borrowers with the same reckless abandon that caused the subprime mortgage crisis. The message from three of the biggest and most aggressive commercial lenders in the country: Don't worry.
Corporate loan rates are falling, but not precipitously, they said. Spreads on working capital, equipment and revolving business lines are still higher than they were before the recession, despite narrowing in the past year because of increased competition and lackluster demand. Underwriting standards are easing, but that's only because they got supertight during the crisis. "It is becoming more competitive," said Daniel Poston, the chief financial officer of Fifth Third of Cincinnati. "But I wouldn't call it irrational competition at this point in time."
In the past year, commercial and industrial lending has become the most desirable market in banking because it is basically the only segment where there is any kind of demand, aside from auto lending. Small banks have begun to complain that large lenders are using their massive scale to drive down rates and standards. Big banks can afford to do that because they are not looking to profit from a new loan so much as the broader customer relationship. Analysts and investors, meanwhile, have begun worrying that C&I loans may be getting too risky.
Lyne Andrich, the CFO at CoBiz Financial of Denver, said at the same conference Thursday that "our largest competitors are being very aggressive on pricing more so than in the past" in the $2.4 billion-asset bank's bread-and-butter loan range of $1 million to $6 million. Andrich said she has seen instances of rates as low as the London interbank offered rate plus 250 basis points, and "some give on structure" such as limited guarantees and other "things that I wouldn't have expected them to do."
William Schwartz, senior vice president of U.S. financial institutions for the ratings agency DBRS of Toronto, said history shows that aggressive lending often does not turn out well, even in seemingly safe sectors. "You always wonder how short the memories are," he said. "Everybody is claiming they are so vigilant right now. You do hope that they are taking that seriously."
Elizabeth Acton, Comerica's CFO, said the Dallas company is being careful to expand its $21.5 billion in commercial loans the right way. Its commercial loan yields fell 4 basis points in the first quarter, to 3.76%. "If you look at loan spreads today, they're still significantly wider than they were three years ago," she said.
Comerica has been making C&I loans for 160 years, Acton said, and has good underwriting and pricing discipline. It does not compete for business solely on price, she said, and its experience provides advantages. "You just suddenly can't say your going to hire a few bankers from another bank and become a big and important C&I lender," Acton said. "The reality is we've had long-standing relationships with a lot of these customers. We're not going to lose [their business] for a few basis points."
Executives acknowledged the challenging economy. "It's a very slow, steady recovery and that trend has not changed," U.S. Bancorp's CFO Andy Cecere said.
But U.S. Bancorp's chief credit officer, P.W. Parker, said the competition was tough, but not unreasonable. "You have seen pricing come down a bit, 25 to 30 basis points," he said. Commercial loan prices remain still higher than they were before the recession, he said, so they are still "very strong." Terms and underwriting aren't weakening so much as rebounding from the unusually tight standards of the downturn, Parker said. Maturities on revolving credit lines are lengthening to five years from three years.
"I don't really consider that underwriting weakening," Parker said. "Those are just natural things that occur in the credit cycle."