Strong Commercial Loan Growth At Major Regional Banks

Apr.19.14 | About: U.S. Bancorp (USB)


U.S. Bancorp and PNC Financial Services post strong commercial loan growth.

Business demand for loans for capital expenditures seems to be picking up.

Continuing earnings improvement and rising returns on equity.

Business lending has increased more rapidly over the past year, but it has not appeared to be sufficiently strong to indicate that the economy is picking up much steam.

Recently, in reviewing the largest domestically chartered banks in the United States, I wrote, referring to the banking week ending April 2, 2014, "As far as the largest domestically chartered banks, their business lending actually declined modestly over the last four-week period, although these loans rose by over $26.0 billion in the last quarter."

The year-over-year rate of loan growth for these banks was just over 5.0 percent.

However, commercial loan growth seems to picking up in some of these banks quite nicely, and it seems to be picking up in terms of buying physical capital, something that the biggest of the banks don't seem to be participating in as much at this time.

Two of these banks, U.S. Bancorp (NYSE:USB), the fifth largest commercial bank in the United States according to asset size, and PNC Financial Services Group, Inc. (NYSE:PNC), the sixth largest commercial bank, both have posted impressive increases in business loan growth over the past year. For U.S. Bancorp the year-over-year rate of increase was 9.7 percent and for PNC, the growth rate was 9.5 percent.

These rates of increase far exceed those of JPMorgan Chase (NYSE:JPM), which experienced a 6.6 percent rate of increase in commercial loans, I believe due to the conservative way it is positioning its loan portfolio going forward, and Wells Fargo Corp. (NYSE:WFC), with a 5.9 percent growth, due to its focus on increasing consumer lending…mortgages and consumer finance. For more on these see my post of April 13, 2014.

Both U.S. Bancorp and PNC suggested that the business community is starting to seek out more money because they believe that the economy is improving and that they can move a little more aggressively going forward. Also, the fact that bank loan rates remain so low is another incentive.

This is good news and it is coming from the heartland…from the Midwest of the United States. U.S. Bancorp is headquartered in Minneapolis, Minnesota and PNC is located in Pittsburgh, Pennsylvania.

Profit-wise the two banking organizations experienced a profit performance in the first quarter that was roughly the same as they earned last year.

U.S. Bancorp earnings fell slightly, earning $1.40 billion this year, down from just $1.43 billion last year.

PNC rose slightly, earning $1.06 billion this year, up from $995 million last year.

Both companies emphasized their effort to continue to control costs. PNC said that noninterest expense fell year-over-year by about 4.4 percent. U.S. Bancorp indicated that noninterest expense was up slightly year-over-year but had fallen from the previous quarter by more than 5.0 percent.

Provisions for loan losses were down in both banks. U.S. Bancorp reduced its credit loss figure by 41 percent from a year ago while PNC's allocation fell by about 40 percent.

Both banks seem to be in good shape as far as the Federal Reserve is concerned. U.S. Bancorp has received Fed approval to increase its quarterly dividend to $0.245 per share. It also has plans to repurchase $2.3 billion in stock.

PNC also obtained approval to increase its quarterly dividend to $0.48 per share. It also has plans to repurchase stock to the amount of $1.5 billion.

Both companies appear to be adequately capitalized.

Even though these two banks are ranked fifth and sixth in terms of asset size for domestically chartered commercial banks, they only total about one-quarter the size of the fourth ranked bank, Citigroup. These banks are truly more "commercial banks" than are the top four in asset sized who are more into "investment banking."

Thus, starting with U.S. Bancorp and PNC we are getting more of a fix on what is going on in the United States in terms of banking and bank lending.

Over the past four years, U.S. Bancorp has earned a return on equity of at least 10 percent and the return has steadily been increasing to where it is over 11 percent now and expected to go higher. The bank appears to be well run and credit quality seems to be an important issue to the management. They do not appear to be stretching at this time for loan growth, and most analysts feel that the growth that they are getting is coming from market-share gains…a good sign.

PNC has a relatively good record since the end of the Great Recession in terms of its return on equity. In 2009, PNC's return on equity was over 11 percent and this has moved up to exceed 13 percent in 2013. Expectations are for the company's return to remain in this area for the near future.

Furthermore, the business model that they are working with should provide much more stable results over time than the models that the four largest banks rely upon. Both companies seem to be intent upon raising their dividend yield and sustaining it.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.