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Commercial Mortgages Led Banks’ Real Estate Loan Growth in April

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Rapid growth in commercial mortgages

According to the latest data released on May 1, 2015, by the Federal Reserve, commercial mortgages for all US commercial banks increased 8.1% YoY (year-over-year) in the week ending April 24, 2015. The commercial mortgage segment grew rapidly over the last few weeks. The weekly YoY growth was above 8% over the latest seven weeks. This is the highest rate over the whole year.

The growth in this segment indicates increased business activity—a positive sign of economic growth. Banks are also more focused on commercial lending. The demand for residential mortgages and consumer loans remains depressed, as we discussed previously in this series.

Wells Fargo (WFC) leads in mortgages and should benefit the most from growth in this loan segment. Other leading banks include JPMorgan Chase (JPM), Citigroup (C), and Bank of America (BAC). They also have big real estate loan portfolios.

Together these four banks form ~27% of the Financial Select Sector SPDR ETF (XLF). Growth in real estate loans will impact banks as well as ETFs like XLF and the iShares U.S. Financials ETF (IYF).

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Small banks show higher growth

Commercial real estate loans for large US commercial banks increased 4.4% in the week ending April 24, 2015—compared to a year earlier. The growth was 9.9% for small banks. Large banks are the top 25 domestically chartered commercial banks—ranked by domestic assets. Small banks are all of the domestically chartered commercial banks not included in the top 25.

As the demand increases, smaller banks are extending loans more in this segment. The availability of liquidity is also supporting the growth.

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