LITTLE ROCK — The biggest U.S. banks are extending less credit amid a faltering economic recovery as regional lenders step in to fill the gap.
Total loans at the four largest U.S. banks - JP-Morgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. - fell 4.9 percent to $3.04 trillion in the first quarter from the same period in 2010, according to data compiled by Bloomberg. Lending by the smallest 17 of the 24 firms in the KBW Bank Index, a banking sector benchmark index, increased 9.8 percent to $1.27 trillion.
The big banks are trimming assets to satisfy stricter capital rules and regulatory demands to dispose of risky loans, while regional lenders, most less than one-tenth the size of JPMorgan, are picking up customers. That could mean lower earnings and profitability for the largest firms, said David Trone, an analyst at JMP Securities LLC in New York.
“They’re deliberately shrinking their size, but that has earnings implications,” Trone said. The removed loans have “been identified as high risk, but actually they’re paying off at par, and they’re high interest rate loans. People think they’re just running off impaired loans that aren’tpaying, and that’s not true.”
The move by regional banks to take up some of the slack is an encouraging sign to David Jones, a former economist at the Federal Reserve Bank of New York and president of Denver-based consulting firm DMJ Advisors LLC.
“It’s the health of the banking system, and the banks’ ability and willingness to extend credit that’s at the heart of any recovery,” Jones said in an interview. “If anything helps in getting this recovery going, it’ll be those regional banks.”
Citigroup, the third-largest U.S. lender by assets, and Charlotte, N.C.-based Bank of America reported the biggest drops. Total loans at New Yorkbased Citigroup fell 10 percent to $648 billion in the two-year period, while those at Bank of America declined 7.6 percent to $902.3 billion.
At Wells Fargo, based in SanFrancisco, loans decreased 1.9 percent to $766.5 billion. JPMorgan, the largest U.S. bank, increased by 1 percent, the only one of the big banks to show an increase.
The four banks held 41 percent of the $7.41 trillion in loans reported by the Federal Deposit Insurance Corp. at the end of the first quarter compared with 43 percent as of the end of March 2010, when the total was $7.5 trillion.
The four firms, which are considered global systemically important financial institutions, are facing a surcharge on top of capital requirements adopted last year by the Basel Committee on Banking Supervision that will be phased in by 2019. The need to hold more capital is leading some banksto reduce loans.
“Big money-center banks had some capital constraints - they actually started paring their loan portfolios,” said Daniel Cantara, executive vice president of commercial banking at Buffalo, N.Y.-based First Niagara Financial Group Inc .,the 21st-largest U.S. lender by assets. “We were able to pick up a lot of customers.”
Bank of America Chief Executive Officer Brian Moynihan, 52, has sold more than $50 billion in assets to raise capital and simplify the firm since taking over in 2010. The company has scaled back in credit-card and home lending, businesses that have inflicted more than $50 billion in losses and impairments since the financial crisis, as it focuses on the most profitable customers and cuts assets that regulators deem risky.
Citigroup, led by CEO Vikram Pandit, 55, has sold more than 60 businesses and reduced assets by at least $600 billion since 2008. It posted a 10 percent decline in creditcard lending in North Americaand reduced loans in Citi Holdings, a division Pandit created for unwanted assets including toxic mortgages, by more than half, according to company filings.
The biggest banks have been paring home-equity andcredit-card loans since 2010. JPMorgan has cut total consumer loans, which include credit-card, mortgage and auto lending, by 14 percent to $430.1 billion since the first quarter of that year.
Wells Fargo’s consumer loans, including mortgage and credit cards, have fallen 7.8 percent to $420.8 billion in the same period.
“The shrinking of the commercial real-estate portfolio and the residential mortgage portfolio has been a function of de-risking strategies,” said Charles Peabody, an analyst at Portales Partners LLC in New York. “Even in credit cards, you had de-risking strategies going on over the last two years.”
That has created an opportunity for regional banks, whichhave increased credit-card and other consumer loans.
“By no stretch of the imagination were these bad customers,” First Niagara’s Cantara said. “A few large moneycenter national, international banks had a lot of the market,and a relatively small-percentage decrease in their portfolio holdings translated to a lot of dollars for smaller banks like us to go out there and add.”
U.S. Bancorp, Cincinnatibased Fifth Third Bancorp and BB&T Corp. in Winston-Salem, N.C., have increased residential mortgage loans since the first quarter of 2010,according to bank filings. U.S. Bancorp, the seventh-largest U.S. lender by assets, had $38.4 billion in mortgage loans at the end of the first quarter, 45 percent more than in 2010, while Fifth Third’s portfolio rose 36 percent to $12.5 billion. BB&T’s residential mortgage loans jumped 39 percent to $21.5 billion.
Business, Pages 25 on 06/27/2012