US Banks’ Strong C&I Loan Growth in Fourth Quarter Is Credit Positive, but May Be Fleeting

US Banks’ Strong C&I Loan Growth in Fourth Quarter Is Credit Positive, but May Be Fleeting

On 13 January, the Federal Reserve issued its H.8 report4 showing strong commercial and industrial (C&I) loan growth for large US commercial banks in fourth-quarter 2011 of an annualized 17.8%, versus 16.1% in third-quarter 2011 and 4.6% a year earlier. The loan growth is credit positive as it will help banks’ profitability after a period of weak growth, but we expect the trend to be short-lived.

Absent strong C&I loan growth in the fourth quarter, overall loan growth would have been an anemic 1.1%. The strong growth in the C&I sector contrasts with a contraction of 2.5% in real estate lending and an increase of 2.8% in consumer lending during the same time period. The growth in the C&I sector is particularly encouraging as increased loan demand by businesses indicates an overall pickup in the economy.

However, the expansion of the business portfolio may be short-lived, as the increase in loan demand may have been fueled by temporary factors. Among those factors was a temporary tax rule in place through the end of 2011 that provided an incentive for companies to accelerate their capital spending to take advantage of the ability to expense 100% of qualified capital equipment. This temporary tax rule encouraged the acceleration of purchases and the borrowing of monies to support these purchases into fourth-quarter 2011.

We don’t think the heady business loan growth will be sustained. There is not as strong an impetus from a tax standpoint to accelerate planned investments, since on 1 January 2012 the first-year deduction for qualified investments reverted back to 50%. However, working in large US banks’ favor is that European banks are exiting the US business sector because of pressing issues in their home markets, creating a potential source of growth for domestic banks in 2012.