Regional banks loan growth picks up as companies borrow again

Regional banks loan growth accelerated in the second quarter as companies took out new loans, secured larger commitments and drew more on existing credit lines, according to earnings reports from KeyCorp, Regions Financial and PNC Financial Services. The figures point to firmer business demand for bank credit, with several lenders also reporting stable or improving credit-quality measures.

KeyCorp, the parent of KeyBank, said period-end commercial and industrial loans rose $2.1 billion, or 3%, from the prior quarter. Average commercial loans increased 3.7%, including a 5% rise in average C&I loans.

The bank said C&I line utilization declined about 50 basis points to 31.1%, indicating that loan growth reflected larger commitments and new borrowing rather than only heavier use of existing facilities. A credit line gives a company approved borrowing capacity that it can draw as needed, so utilization shows how much of that capacity is being used.

Why are regional bank loans growing?

Regions Financial reported a 4% quarter-over-quarter increase in average business loans. The bank said growth was led by power and utilities, manufacturing, government and public sector lending, and retail trade.

Regions Chief Financial Officer Anil Chadha described a 100-basis-point rise in credit-line use, to 33.5%, as “positive” on the company’s earnings call. Chief Executive John Turner told analysts that loan pipelines were about 15% higher than a year earlier and remained diversified across industries, markets and client segments. Commitments increased 7%, and more than half of new lending was investment grade, the bank said.

Turner said most of the growth came from new loan production and higher commitments. Chadha said the increase also reflected new customers, expanded ties with existing clients and more bridge loans connected to maturing debt. Turner also tied the increase in line usage to ongoing investment by commercial customers.

PNC Financial Services said average commercial loans climbed $13 billion, or 5%, from the first quarter, supported by both new lending and greater use of existing credit lines.

What did banks report on credit quality?

The stronger lending figures did not coincide with a broad deterioration in the credit metrics disclosed by the banks.

At Regions, net charge-offs declined to 42 basis points of average loans from 54 basis points in the first quarter. Business loans rated criticized fell to 5.01% from 5.15%, and nonperforming loans declined to 0.67% of total loans from 0.71%.

PNC said total delinquencies were down 8% from March 31, led by commercial loans. Nonperforming loans fell 10% to 0.55% of total loans, while the annualized net charge-off rate decreased to 25 basis points from 29 basis points.

Origin Bancorp, a smaller regional lender, reported a 2.7% increase in loans from the first quarter and a $9 million decline in nonperforming assets.

Deposits and payments are part of the loan relationship

Commercial lending can also bring operating deposits and fee-generating services. Companies that borrow from a bank may keep payroll funds, receivables, payables and payment flows at the same institution.

KeyCorp management said on its earnings call that about 91% of its commercial loans are to customers that also use the bank for deposits, payments or capital-markets services. The bank said 82% of commercial deposit balances are in operating accounts, and 96% come from customers with an operating account. Average noninterest-bearing deposits rose 2.3% in the quarter.

At Regions, Turner said small business balances accounted for slightly more than 30% of quarter-over-quarter growth in average noninterest-bearing deposits. The bank also said the share of customers using treasury management services has risen from 57% to more than 66% over roughly five years.

Origin said noninterest-bearing deposits increased 9.6% from the first quarter to 26% of total deposits. Deposit-account openings rose more than 36% year over year in the first half, including an 82% increase in June. Origin Bank President and CEO Lance Hall said treasury-management revenue was growing at an annualized pace of about 15%.

This story draws on original reporting from PYMNTS.