Bankers have spent months saying they are making every good loan possible, and now regulators are demanding more information to prove it.
A low-profile change to quarterly call reports requires banks to list the amount of unfunded commercial and industrial loan commitments they have, giving better insight into how much credit they are extending. C&I is an important area to highlight, given that bankers have touted such loans as the most attractive opportunity on the road to recovery.
Not only will the information help show which banks are fulfilling their pledges to put capital to work with commercial borrowers, but it will also give investors ammunition to query executives when quarterly conference calls begin in less than two weeks.
"This is a conversation starter for all parties," said Tim O'Brien, a managing director at Sandler O'Neill & Partners LP. "It's a great stepping-off point for investors to understand what is going on with one of the most highly relevant loan categories in terms of the economic recovery."
Banks started making such disclosures in their first-quarter filings with the Federal Deposit Insurance Corp. But analysts said that it will take further disclosures in subsequent quarters to determine lending trends. Establishing which banks are making progress in C&I lending, a quickly crowding field, will be particularly useful among regional banking companies — which are largely eschewing commercial real estate lending and have fewer fallbacks than the biggest banks.
BB&T Corp., for instance, has touted C&I as a big opportunity for the Colonial Bank branches it bought in August, due to the failed bank's heavy concentration on CRE rather than commercial loans. Comerica Inc. has also forecast higher C&I volume as clients need more working capital, saying such a trend could contribute to low-single-digit loan growth through yearend. Fifth Third Bancorp has also discussed near- to moderate-term growth in C&I lending.
Banks that show notable increases in unfunded C&I commitments, for instance, would be signaling that they are making more commercial credit available and perhaps show an increased appetite by businesses for growth.
Still, the data is not perfect information. Decreases would be difficult to interpret, observers said. It could mean that more borrowers are tapping into existing lines, or that banks are cutting off lines or letting them expire without renewal. As a result, many observers believe that bank executives will be pressed to provide more details around the data, during quarterly calls or conferences.
"Obviously these are unfunded commitments, so you don't know when — or if — they are going to be used," said Frank Barkocy, the director of research at Mendon Capital Advisors Corp. "It suggests that there is a potential backlog of business, but you need more verification that clients are actually looking to tap into the loans."
Still, they provide "a better indication of what is going on other than guesswork or just going on what the companies are saying. Transparency is still a good thing."
Though some investors might view an increase in such commitments as a sign of recovery, others might see cause for concern. Those observers point to 2008, when banks were eager to close unfunded commitments for fear that cash-strapped companies might tap the lines in a last-ditch bid to remain solvent.
There are still examples of banking companies shrinking their unfunded commitments to improve overall credit quality. Zions Bancorp, for instance, reduced its lines in both C&I and construction commitments in the first quarter, allowing it to reduce its loan-loss provision for such exposure by more than $20 million.
"There is a positive spin, but the flip side is that these lines could be drawn down tomorrow, creating incremental exposure" for the lender, said Walter Todd 3rd, a portfolio manager at Greenwood Capital Associates LLC.
Gary Townsend, the chief executive of Hill-Townsend Capital LLC, said he would be surprised to see a significant change in the data from the initial first-quarter disclosures, at least in the short term. "It's no secret that loan growth is less than robust," he said.
"When that changes, you'll be able to see which banks are gaining market share," Townsend added. "An increase would generally be viewed positively because the lender is able to collect some fees on a commitment even if they haven't extended a loan. And obviously it shows that there is the potential for a loan."
Finally, observers said the data will serve as a starting point to ask executives about pricing and terms for such commitments. A sharp increase, for instance, could draw more inquiries about the structures behind the lines extended.
"In a market that is likely to grow more competitive regardless of whether an economic recovery takes hold, it will behoove investors to closely monitor the loan pricing and covenant requirements of C&I lenders," O'Brien said. "We look forward to doing just that in the coming quarters."
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