U.S. Commercial Lending Continues to Lag Demand as Banks Recover Slowly

by: Research Recap

Two new reports from Standard & Poor's suggest that despite improved credit quality and balance sheets, US banks are still a couple of years away from a full recovery from pre-financial crisis levels of performance. S&P's data also shows that commercial bank lending continues to lag demand.

Total bank assets of U.S. banks grew in May at an annualized monthly rate of 11.5%, slightly lower than the 13.6% in April, S&P notes in U.S. Bank Balance Sheet Trends: A Flash In The Pan?

A buildup in cash and trading assets, indicating bank management teams continue to be risk averse and new lending remains muted, largely drove asset growth for May.

Growth in securities aided asset growth in the previous two monthly reports, but securities reversed that trend sharply and declined in May at a monthly rate of 8.7%. Commercial and industrial (C&I) loans maintained positive momentum with 12.7% monthly growth, faster than the 7.7% recorded in April but less than the 13.6% recorded in March. In our opinion, the positive asset growth does not yet indicate improving market conditions on a sustained basis. Standard & Poor's Ratings Services still believes it may take at least a couple of years before loan growth exceeds GDP growth.

Bank Loan Growth
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S&P takes a closer look at recent credit quality trends in Credit Quality Slowly Improves For U.S. Banks, For Now

  • Key asset quality metrics continued to show notable improvement in first-quarter 2011, both year on year and quarter on quarter.
  • Some indicators – for example, early delinquencies, net charge-offs, and nonperforming loan formation rates – improved from first-quarter 2010 across all loan categories, though this improvement was not yet uniformly observed across all metrics.
  • Notwithstanding the recent improvements, credit quality metrics by and large still diverged from their long-term normalized levels. However, commercial and industrial loans continued to show above-average strength because NPL ratios were below their long-term averages.
  • We continue to believe that asset quality will keep improving during 2011 and 2012, but the pace of improvement should slow. Commercial and industrial loans (C&I) and credit cards have led asset quality improvement trends.
  • Conversely, credit quality metrics for commercial mortgages and construction and development loans indicate a still-challenging environment despite declining net charge-off rates for both categories. Typically, losses for the latter tend to be lumpy and protracted. Should interest rates rise sharply, to which we apply a low probability, losses could rise as well.