Loan growth rates raise red flags

Two new outlook reports have raised concerns about the current accelerating loan growth and easing of underwriting conditions reported by US banks and financial institutions amid worries that this could raise lending risks in the longer term.

The Office of the Comptroller of the Currency’s (OCC) semi-annual Risk Perspective Report shows that net charge offs are running below 25-year averages for all major loan type categories on US bank balance sheet. However, commercial and industrial (C&I) lending still growing at nearly 10% per year over the past four years. While this growth trajectory is less aggressive than in 2004-2008 it remains troubling, the research suggests.

Similarly, recent Fitch Ratings reports have highlighted loan growth in excess of economic growth in several areas including C&I lending and consumer lending, particularly at community banks.

The Fitch research cautions that competition for C&I lending is now highly intense and is at times being driven by nonbank lenders with weaker oversight than banks. The low interest rate environment, which is likely to move higher in 2015, is also a factor as Fitch argues the rate environment has been supporting C&I’s better than historical average credit quality.

The OCC’s report found that within the C&I segment, loans to real estate and construction sectors, as well as to finance and insurance sectors, led in year-over-year growth in the second quarter of 2014 among the 24 commercial categories tracked by the regulator.