When we last checked in on US bank Commercial & Industrial (C&I) loans back in November 2018, we made the following 2 points:
#1: Contrary to all the concerns over domestic economic conditions, C&I loans were still growing at a decent clip. October had just posted 5.8% growth, the best of the year. We noted that was important for both bank loan growth (C&I as a loan category is larger than residential/commercial real estate, for example) and as a sign of business confidence.
#2: Despite that upbeat message, we warned that investors would view the C&I data as a sign of late-cycle borrowing by companies worried about a slower economy. Because of those concerns, we doubted equity markets would award bank stocks better multiples.
Since both observations proved true enough – the US economy continues to chug along and bank stocks are still in the doghouse – today we would like to revisit the C&I data and see what it says now. Two points here:
#1: C&I loan growth has continued to accelerate in 2019.
- Late March 2019 data (seasonally adjusted) shows 10.0% growth versus the same period last year.
- January and February also posted double-digit gains of 10.0% and 10.3%.
- This growth came even as bank loan officers reported tightening loan standards for all sizes of C&I customers (small, medium and large corporations).
#2: Delinquency rates continued to improve through the balance of Q4 2018 (latest data available) after an uptick in 2016.
- Q4 2018 delinquency rates were 0.94%, the lowest of the year. They were as high as 1.6% in Q2/Q3 2016.
- Current delinquency rates compare very favorably to past peak-cycle performance: 1.2% (Q4 2006), 1.7% (Q4 1997) and 5.0% (Q4 1988).
- Charge-off rates show similarly positive trends at 0.26% in Q4 2018, the lowest of the year. Past cycle lows in 1995 and 2006 were 0.12% and 0.21%, respectively.
- Also worth noting: C&I delinquency rates are far lower than US banks’ aggregate loan books, which currently stand at 1.5% at the end of Q4 2018. Even still, total delinquency rates are on par with last cycle’s low of 1.5% in Q2 2006 and 2.1% in Q4 1999.
The upshot here: as with our take back in November, growth in C&I tells a good story about the US economy (more leverage signals confidence) but it is still hard to spin it into a positive investment case for bank stocks. Historically, the best time to buy the group has been when loan growth is negative double-digits and delinquencies are peaking. The best thing one can say about bank stocks now is that expectations are very low going into earnings reports later this week. Perhaps there is a trade there, but we remain cautious on the group.