Commercial and industrial loans peaked in August 2015

Commercial and industrial loans peaked in August 2015 to $1.91 trillion, the highest ever for the United States (SPY). In 2Q15, commercial and industrial loans grew by a whopping 11.90%.

Since 2010, the growth in total loans has been driven primarily by commercial loans. While GDP has grown 20.3% to $1.79 trillion, commercial loans have grown by 53% in the same period to $1.85 trillion.

Commercial Loans Peaked in August

Comparatively, manufacturing PMI (purchasing managers’ index) for August stood at 51.1 compared to 52.7 for July and 53.5 for June. A reading above 50% indicates that the manufacturing economy is generally expanding, but in the last few months, PMI has actually been falling.

Lower growth in manufacturing and inventory, as suggested by PMI data coupled with a rising yield curve, may lead to softening of growth in the commercial and industrial loans segment. This segment accounts for 22.8% of total loan portfolios in the commercial banking sector.

Understanding the relationship between economic growth and commercial and industrial loans

As manufacturing activity grows, so does economic growth. This in turn leads to an increase in demand for commercial and industrial loans and a rise in income levels. These factors lead to lower defaults on loans, which is positive for the banking sector. However, economic growth has been faltering recently due to recent global growth concerns. This sluggish pace of growth might not act as a real catalyst for the banking sector.

The Federal Reserve is closely monitoring these economic growth indicators to inform its stance on an interest rate hike. Although these sustained low rates have led to rising demand for loans, it has hurt banks’ margins.

Big banks within the Financial Select Sector SPDR ETF (XLF) have significant commercial and industrial loan portfolios. Commercial and industrial loan portfolios of Bank of America (BAC), Wells Fargo (WFC), and JP Morgan (JPM) make up 8.9%, 8.5%, and 5.8% of total commercial and industrial loans, respectively.

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