Rapid loan growth
According to the latest data released on May 1, 2015, by the Federal Reserve, total loans for all US commercial banks increased 8.2% in the week ending April 24, 2015—compared to a year earlier. The loans grew 8.1% YoY (year-over-year) in the prior week. Healthy loan growth is vital to banks’ income growth.
Types of loans
The above graph shows the weekly YoY total loan growth for all US commercial banks. Total loans are generally classified into commercial and industrial loans, consumer loans, and real estate loans.
Commercial and industrial loans are loans to businesses. Consumer loans include card loans, student, auto, and other consumer loans. Real estate loans include residential mortgage, home equity, and commercial mortgage.
The big four banks—JPMorgan Chase (JPM), Wells Fargo (WFC), Citigroup (C), and Bank of America (BAC)—offer all three types of loans. Bank of America has the biggest loan portfolio. It’s followed by Wells Fargo. While Citigroup is strong in card and commercial loans, Wells Fargo’s strength lies in mortgage lending. Together these four banks form ~27% of the Financial Select Sector SPDR ETF (XLF).
Commercial and industrial loans lead the growth
Commercial and industrial loans increased 12.3% during the week—compared to the previous year. This segment has been growing at more than 10% for almost a year now, as shown in the above graph.
The growth in this segment indicates increased business activity—a positive sign of economic growth. Banks are also more focused on commercial lending because the demand for residential mortgages and consumer loans remains depressed.
A concern associated with this rapid growth is that banks have loosened underwriting standards, potentially increasing risk. Although the default rates have gone down, risk might increase if the economic situation worsens.