Small Bank Loan Growth Jumps as PPP Funding Ramps Up

By S&P Global Market Intelligence


Commercial loan growth reaccelerated across much of the U.S. banking industry as lenders began to fund federally backed small business loans and prepared to start processing a second round of applications under the coronavirus relief program.

Excluding the 25 largest institutions by assets, commercial and industrial loans increased 6.3% during the week ended April 15, according to seasonally adjusted data in the Federal Reserve's most recent H.8 report on commercial banks. That represents a huge jump from growth rates of 0.6% to 0.8% in the preceding two weeks, and leapfrogs growth of 2.1% to 2.3% during two weeks in March when corporate draws against bank credit lines were particularly heavy.

Since large corporations tend to do business with large banks, C&I growth had been stronger at the 25 biggest institutions, peaking at week-over-week growth of 8.3% in March. But smaller banks appear to have started funding Paycheck Protection Program loans faster than their biggest peers.

"The spike in the small bank trend likely reflects the onboarding of PPP loans, a trend which we expect will continue to skew the data through the end of April with the reloading of the program this week," Compass Point analyst David Rochester wrote in an April 24 note.

Under the PPP, which is designed to induce small businesses to retain their employees, the government will wipe out loan amounts that small businesses use on payroll and other expenses. The Small Business Administration, which is administering the program, approved loans that used up the initial $350 billion allotted about two weeks after it was launched. The SBA started accepting applications for a new $310 billion authorization on April 27.

Overall, C&I loans across commercial banks increased $537.91 billion, or 23%, from March 4 to April 15, with much of the growth explained by borrowing against existing lines by corporations that large banks said subsided in April. Companies had been frightened about their ability to access cash to survive the pandemic-driven downturn, but interventions by the Federal Reserve have helped thaw debt capital markets.

Analysts at BofA Global Research said in an April 21 note that some companies are showing new signs of confidence that they can make it through the pandemic by tapping "wide open" corporate bond markets to pay down revolving loans from banks.

With line borrowing tapering, Synovus Financial Corp. said that PPP loans will become its "primary engine for loan growth." On April 24, the Columbus, Ga.-based bank, which had total net loans of $38.26 billion at the end of the first quarter, reported that it had funded more than $2 billion of PPP loans so far.

Overall, scores of banks have reported PPP volumes larger than 5% of their total loans at year-end 2019. In addition to an interest rate of 1%, the PPP loans generate processing fees for banks that range from 1% to 5% of loan amounts, and that banks expect to recognize as interest income. Since large proportions of the loans will pay off as they are forgiven by the government over the coming months, analysts expect the revenue to produce a large, short-term boost to earnings at many companies.

Keefe Bruyette & Woods estimated that after-tax PPP fees would represent more than 20% of its 2020 EPS forecasts for more than 30 banks, including Synovus, Umpqua Holdings Corp., Orrstown Financial Services Inc., Mercantile Bank Corp., Wintrust Financial Corp., IBERIABANK Corp., Central Valley Community Bancorp and Sandy Spring Bancorp Inc.

Across the industry, the ongoing increase in commercial lending was offset by a continuing decline in consumer loans. A contraction in credit card loans, driven by a collapse in consumer spending, accelerated to a drop of 2.1% in the week ended April 15 from a drop of 1.7% in the week ended April 8. That produced the first year-over-year decline since 2014.

Deposits rebounded to strong growth, increasing 2.5% in the week ended April 15 after a 0.1% decline in the week ended April 8. Rochester said the growth could reflect direct payments to households the government is sending out under coronavirus relief legislation. Truist Financial Corp. cited the payments in its first-quarter earnings report, saying they lifted its deposits by $6 billion in one day in mid-April alone.