Biggest U.S. Banks Shrink Loans

Regional lenders step up to fill the gap as big banks trim assets to comply with capital rules.

The biggest U.S. banks are extending less credit amid a faltering economic recovery as regional lenders step in to fill the gap.

Total loans at the four largest U.S. banks -- JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. -- fell 4.9 percent to $3.04 trillion in the first quarter from the same period in 2010, according to data compiled by Bloomberg. Lending by the 17 smallest of the 24 firms in the KBW Bank Index increased 9.8 percent to $1.27 trillion.

The big banks are trimming assets to satisfy stricter capital rules and regulatory demands to dispose of risky loans, while regional lenders, most less than one-tenth the size of JPMorgan, are picking up customers. That could mean lower earnings and profitability for the largest firms, said David Trone, an analyst at JMP Securities LLC in New York.

“They’re deliberately shrinking their size, but that has earnings implications,” Trone said. The removed loans have “been identified as high-risk, but actually they’re paying off at par and they’re high interest-rate loans. People think they’re just running off impaired loans that aren’t paying, and that’s not true.”

That regional banks have taken up some of the slack is an encouraging sign to David Jones, a former economist at the Federal Reserve Bank of New York and president of Denver-based consulting firm DMJ Advisors LLC.

“It’s the health of the banking system and the banks’ ability and willingness to extend credit that’s at the heart of any recovery,” Jones said in an interview. “If anything helps in getting this recovery going, it’ll be those regional banks.”

Citigroup, the third-largest U.S. lender by assets, and Charlotte, North Carolina-based Bank of America reported the biggest drops. Total loans at New York-based Citigroup fell 10 percent to $648 billion in the two-year period, while those at Bank of America declined 7.6 percent to $902.3 billion.

At Wells Fargo, based in San Francisco, loans decreased 1.9 percent to $766.5 billion. JPMorgan, the largest U.S. bank, was the only one of the big banks to show an increase, of 1 percent.

The four banks held 41 percent of the $7.41 trillion in loans reported by the Federal Deposit Insurance Corp. at the end of the first quarter compared with 43 percent as of the end of March 2010, when the total was $7.5 trillion.

 

Dimon, Bernanke

Considered global systemically important financial institutions, the four firms are facing a surcharge on top of capital requirements adopted last year by the Basel Committee on Banking Supervision that will be phased in by 2019. The need to hold more capital is leading some banks to reduce loans.

Last June, JPMorgan Chief Executive Officer Jamie Dimon pressed Federal Reserve Chairman Ben S. Bernanke at a public forum about whether regulators have gone too far reining in the U.S. banking system. He asked if the central bank had studied the cumulative effect of capital requirements, mortgage standards and other rules, and whether those will constrain credit and slow economic growth.

Fed officials last week cut their estimates for 2012 gross domestic product growth in the U.S. by half a percentage point, noting that the rate means demand is too weak to achieve full employment by 2014. Last month, payrolls climbed less than the most-pessimistic forecast in a Bloomberg News survey, and the jobless rate rose to 8.2 percent from 8.1 percent.

“Big money-center banks had some capital constraints -- they actually started paring their loan portfolios,” said Daniel Cantara, executive vice president of commercial banking at Buffalo, New York-based First Niagara Financial Group Inc., the 21st-largest U.S. lender by assets. “We were able to pick up a lot of customers.”

Bank of America CEO Brian T. Moynihan, 52, has sold more than $50 billion in assets to boost capital and simplify the firm since taking over in 2010. The company has scaled back in credit-card and home lending, businesses that inflicted more than $50 billion in losses and impairments since the financial crisis, as it focuses on the most profitable customers and cuts assets that regulators deem risky.

The bank’s 8 percent decline in outstanding card loans to $112.6 billion in 2011 was the biggest among the top 10 U.S. issuers, according to the Nilson Report, an industry newsletter. The firm went from being the largest U.S. home lender after the 2008 takeover of Countrywide Financial Corp., with almost one-quarter of the market, to No. 4 with 4.2 percent as of March 31, according to trade journal Inside Mortgage Finance.

Moynihan said in a Bloomberg Television interview last year that every percentage point of additional capital required by regulators reduces potential bank lending by $18 billion. Tony Allen, a Bank of America spokesman, declined to comment.

 

Citigroup Cuts

Citigroup, led by CEO Vikram Pandit, 55, has sold more than 60 businesses and reduced assets by at least $600 billion since 2008. It posted a 10 percent decline in credit-card lending in North America and reduced loans in Citi Holdings, a division Pandit created for unwanted assets including toxic mortgages, by more than half, according to company filings.

“The decrease in Citigroup’s loans is attributable to the wind-down of non-core assets in Citi Holdings,” Jon Diat, a Citigroup spokesman, said in an e-mail.

The biggest banks have been paring home-equity and credit-card loans since 2010. JPMorgan cut total consumer loans, which includes credit-card, mortgage and auto lending, by 14 percent to $430.1 billion since the first quarter of that year. Wells Fargo’s consumer loans, including mortgage and credit cards, have fallen 7.8 percent to $420.8 billion in the same period.

“The shrinking of the commercial real estate portfolio and the residential mortgage portfolio has been a function of de-risking strategies,” said Charles Peabody, an analyst at Portales Partners LLC in New York. “Even in credit cards, you had de-risking strategies going on over the last two years.”

That has created an opportunity for regional banks, which have increased credit-card and other consumer loans.

“By no stretch of the imagination were these bad customers,” First Niagara’s Cantara said. “A few large money-center national, international banks had a lot of the market, and a relatively small percentage decrease in their portfolio holdings translated to a lot of dollars for smaller banks like us to go out there and add.”

U.S. Bancorp, Cincinnati-based Fifth Third Bancorp and BB&T Corp. in Winston-Salem, North Carolina have boosted residential mortgage loans since the first quarter of 2010, according to bank filings. U.S. Bancorp, the seventh-largest U.S. lender by assets, had $38.4 billion in mortgage loans at the end of the first quarter, 45 percent more than in 2010, while Fifth Third’s portfolio rose 36 percent to $12.5 billion. BB&T’s residential mortgage loans jumped 39 percent to $21.5 billion.

 

Kitchen Cabinets

Moving from a big bank to a smaller one wasn’t difficult for borrowers such as Patrick Foley, who owns six manufacturing companies that produce items including kitchen cabinets and decorative knobs. He said he switched to Minneapolis-based U.S. Bancorp after Bank of America, his lender for 30 years, didn’t increase a $4 million line of credit for two of his firms, Continental Hardware Corp. and Continental Home Hardware, both based in Portland, Oregon.

“They’re very receptive when you’ve hit the wall,” Foley said of his new bank’s attitude about credit. “They’re creative about what your needs are, not their needs.”

Annah Tran, 34, a dentist who runs her own practice in Fairfax, Virginia, also left Bank of America last year after borrowing to expand her practice from two full-time employees to six. She refinanced and consolidated $605,000 of loans with Buffalo, New York-based M&T Bank Corp.

“It wasn’t difficult to get in touch with Bank of America, but you never knew who you were going to get,” Tran said in a phone interview. With M&T, “I’m a small business, they’re a small business. It was like keeping it in the family and keeping it personal.”

Anne Pace, a spokeswoman for Bank of America, said the company doesn’t comment about individual customers.

Wells Fargo, JPMorgan and Citigroup have all bolstered commercial and corporate lending. Wells Fargo’s $345.7 billion in commercial loans at the end of the first quarter was 16 percent higher than the first quarter of 2010. Citigroup’s corporate loans jumped 42 percent to $228 billion in that time.

The biggest lenders are focusing on large transactions because they provide higher returns for the amount of effort, said Jim Dunlap, director of regional and commercial banking at Huntington Bancshares Inc. The Columbus, Ohio-based firm boosted total loans by 10 percent since the end of the first quarter of 2010 to $40.7 billion this year.

 

Banking Bifurcation

“We’re finding some larger institutions less focused on that particular work, because to compete they have do it on price,” Dunlap said in an interview. “It takes the same amount of effort if it’s a $20 million loan or a $200 million loan. That’s why you’re seeing the bifurcation now. They need a much higher return on effort.”

Corporate clients are now more open to switching banks or adding a regional lender, said Terry Begley, CEO of corporate banking at Pittsburgh-based PNC Financial Services Group Inc.

“Corporate America had a crisis too in 2008 -- it wasn’t purely a banking crisis, it was an economic crisis, and there was some fear around the liquidity and balance sheets of some of the bank partners,” Begley said. “If you were a corporate CFO or treasurer, there was some concern on that, and I think they spend more time evaluating their banks right now and the strength of those relationships.”

Regional banks also increased loans through consolidation. Capital One Financial Corp. CEO Richard Fairbank, 61, who runs the sixth-largest U.S. bank by deposits, has spent more than $28 billion on acquisitions since 2005. The McLean, Virginia-based firm’s total loans have jumped 33 percent since the first quarter of 2010.

Regional and community banks are expanding total loans because their customers, including small businesses, are borrowing, said Dennis Logue, a professor of management at Dartmouth College’s Tuck School of Business and chairman of Hanover, New Hampshire-based Ledyard Financial Group Inc., which had $393.3 million in assets as of March 31.

“The community bankers’ clientele are more in need of loans right now than the big banks’ clientele,” Logue said. “They don’t have the big cash stashes that the large corporations have. The large corporations are either sitting on their money, or they’re not borrowing.”

 

Book Value

Investors are valuing regional lenders more than the four biggest banks. The 17 smallest KBW Bank Index lenders had an average price-to-tangible-book value of 1.5 at the end of the first quarter, compared with a 1.2 average for JPMorgan, Bank of America, Wells Fargo and Citigroup, according to data compiled by Bloomberg.

Bank of America and Citigroup shares are both trading below tangible book, a measure of what investors are willing to pay for a firm’s equity after removing intangible items such as goodwill and brand names that would have little value if the company went out of business.

“It’s been clear to the bigger banks that public policy is not looking favorably upon bigness,” said Lawrence White, an economics professor at New York University’s Stern School of Business. “If they’re shrinking, that means they’re going to be doing less stuff, including making fewer loans.”

 

Bloomberg News'

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