Article of the Week  

US lending to businesses is reaching record levels but banks are privately warning that the activity should not be seen as evidence of an economic recovery.
 

Much of the corporate lending is going to fund payouts to shareholders, finance acquisitions and fuel the domestic energy boom, bankers say, rather than to support companies’ organic growth.
 

“Loan growth doesn’t seem to be driven by the underpinning of an economic recovery in terms of new warehouses and [capital expenditure],” said one senior corporate banking executive at a large US bank. “You don’t see the foundation, the real strong demand.”
 

Total outstanding commercial and industrial (C & I) lending, which runs the gamut of loans to sectors from energy to healthcare and excludes consumer or real estate loans, rose to a record $1.7tn in May from a post-crisis trough of $1.2tn nearly four years ago, according to data from the Federal Reserve Bank of St Louis.
 

For the top 25 US commercial banks by assets, C & I lending grew by 10.5 per cent in the quarter to June 25 from the previous quarter, according to annualised weekly data from the Federal Reserve.

This type of lending is an important source of business for the largest US banks, representing about a fifth of all loans made by the likes of Bank of America, JPMorgan Chase and Wells Fargo, according to Citigroup research.
 

While low interest rates have made business lending less lucrative, the relationships it forges open doors for the banks to sell other services such as treasury management, hedging and leasing.
 

A second corporate banking executive at a large regional lender said: “The larger part of the usage in the market right now are loan refinancings where companies are paying dividends back out.” He added: “They’re requesting increased loans or usage under a lien in order to pay a dividend or equity holders of a company. Traditionally banks have been very cautious of that.”
 

Charles Peabody, a bank analyst at Portales Partners in New York, has warned that while it is hard to extrapolate what is driving commercial and industrial lending, if it is to fund acquisitions or share buybacks it may not indicate a strengthening economy.
 

“It is loan growth, just not sustainable,” he said.

Other analysts point to a recovery in capex data. Deutsche Bank analysts wrote on June 30: “Capex indicators suggest a rebound not only from 1Q softness but also from the slow pace of the past 2 years.”
 

Bank executives describe a “frothy” US corporate lending market. With that, has come broad loosening of underwriting standards, as shown in recent reports from the Office of the Comptroller of the Currency.
 

US banks reported reducing the cost of credit lines, decreasing the use of interest rate floors, easing loan covenants and reducing risk premiums, according to the OCC’s most recent loan officers’ survey in April.
 

The energy boom has helped to boost lending in areas such as North Dakota, Pennsylvania and Texas, bankers say. “It’s crazy, it’s the boom, it’s the gold rush. Small companies are becoming large companies overnight,” the first executive said.