Commercial and industrial loan growth
After peaking in 1Q15, commercial and industrial growth slowed down in April and May. According to data released by the Federal Reserve, its growth was 10.4% in April and 9.5% in May 2015.
The manufacturing PMI (purchasing managers’ index) for May stood at 52.8%—compared to 51.5% for April. A reading above 50% indicates that the manufacturing economy is generally expanding. However, growth of just 1.3% is considered flat. While the economy may actually be growing, its pace is slower than expected.
Manufacturing growth is increasing
In May 2015, the production index declined from 56% to 54.5%. The ISM’s (Institute of Supply Management) Backlog of Orders Index was 53.5% in May. It increased by 4%—compared to 49.5% in April following two months of contraction.
As the economy grows, the demand for loans increases, income levels rise, and defaults on loans decrease. However, the sluggish growth might not act as a real catalyst for the banking sector. The Federal Reserve is closely monitoring these economic growth indicators to determine its stance on an interest rate hike. The sustained low rates have been negative for banks.
Lower growth in manufacturing and inventory—as suggested by PMI data, a backlog of orders, and a rising yield curve—may lead to softer growth in the Commercial and Industrial Loans segment. This segment accounts for 22.8% of the commercial banking sector’s total loan portfolios.
Major banks’ market share
Big banks within the Financial Select Sector SPDR ETF (XLF) have significant commercial and industrial loan portfolios. Bank of America (BAC), Wells Fargo (WFC), JPMorgan Chase (JPM), and PNC Financials Group’s (PNC) commercial loan portfolios account for 8.9%, 8.5%, 5.8%, and 3.56% of the total commercial and industrial loans, respectively. Among these banks, JPMorgan Chase has been the best performer. It traded at $68.25 as of June 16—up 9.06% YTD (year-to-date) and still 3% below consensus price estimates.