Q2 2014 Banking Review: Outstanding Loan Portfolio

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One of the primary reasons behind the Federal Reserve’s decision to slash interest rates to record lows in the wake of the economic downturn of 2008 was to jump-start the country’s battered economy by encouraging individuals and businesses to take on fresh loans. The rationale behind this is simple enough – as individuals spend the money they borrow, the demand for products and services will increase, and businesses of all sizes will use the credit extended to them to cater to this growing demand. The fact that the Fed has maintained interest rates at these low levels for nearly six years now indicates that key economic metrics have not recovered sufficiently for the central bank to consider hiking interest rates to normal historical levels. But the strategy has definitely had the desired effect, as lending activity has improved steadily over the years. The total outstanding loans for all commercial banks in the country jumped from under $6.5 trillion in early 2010 to almost $7.8 trillion at the end of August. [1] This compares to the pre-recession peak figure of $7.3 trillion for the total size of loans in October 2008.

But loans haven’t grown uniformly across U.S. banks, with some reporting 4-5% annual growth in outstanding loans in recent years while others have hardly reported any improvement in these figures. Also, for each bank, the growth rate has varied considerably across the various loan categories. In this article, we detail the trends in the loan portfolio of the country’s largest commercial banks – JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), U.S. Bancorp (NYSE:USB) and Capital One (NYSE:COF) – over the last two years and also compare the proportion of different loan types in each of their loan portfolios.

See the full Trefis analysis for Wells FargoJPMorganU.S. BancorpBank of AmericaCitigroup Capital One

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A commercial bank’s total loans include mortgages, credit card loans, retail consumer loans (such as auto loans and student loans), commercial & industrial loans and commercial real estate (CRE) loans. The table below captures the average size of each bank’s total loan portfolio in each of the last ten quarters. The data has been compiled using figures reported by individual banks as part of their quarterly announcements and includes every type of loan handed out by the banks.

(in $ billions) Q1’12 Q2’12 Q3’12 Q4’12 Q1’13 Q2’13 Q3’13 Q4’13 Q1’14 Q2’14
Bank of America 913.7 899.5 888.9 893.2 906.3 914.2 924.0 929.8 919.5 912.6
Wells Fargo 768.6 768.2 776.7 787.2 798.1 800.2 804.8 816.7 823.8 831.0
JPMorgan Chase 715.6 725.3 723.1 725.6 725.1 727.5 723.5 729.6 730.3 737.6
Citigroup 647.0 646.2 653.8 649.6 643.1 642.4 645.5 659.4 658.7 665.1
U.S. Bancorp 210.2 214.1 216.9 220.3 222.4 225.2 229.4 232.8 235.9 240.5
Capital One 152.9 192.6 202.9 202.9 196.0 190.6 191.2 192.8 193.7 195.0

Notably, Bank of America has a larger loan portfolio than any of its competitors, with an average of just over $910 billion in outstanding loans for the second quarter of 2014. The bank reported a steady decline in total loans since the economic downturn as a direct result of its efforts to cut costs and improve its operating focus under its sweeping reorganization plan dubbed Project New BAC. A chunk of the decline over the period came from a reduction in Bank of America’s mortgage portfolio, which shrunk from roughly $450 billion in early 2010 to just over $330 billion now. In late 2012, a focus on its commercial lending business and the rising demand for cash by enterprises helped the bank raise the size of its commercial loan portfolio from under $250 billion in early 2011 to almost $350 billion in Q2 2014. The decline in Bank of America’s total loan portfolio over the last two quarters after increasing for five consecutive quarters can be explained by two factors: the seasonal nature of loans, which see more repayments in the first quarter compared to any quarter of the year, and the bank’s decision to sell off some of its branches earlier this year.

Wells Fargo comes in second with a loan portfolio of $831 billion. Not surprisingly, mortgages make up the largest portion of this figure – $323 billion for Q2 2014, or almost 40% of all loans . The bank has been focused extensively on growing its mortgage business since the economic downturn and is the undisputed leader in the industry when it comes to mortgage originations and servicing. The bank leapfrogged to the second position in the list in early 2009, after it acquired Wachovia’s operations at the peak of the downturn.

With $738 billion in loans, JPMorgan Chase comes in at the third position, followed by Citigroup with loans worth $665 billion on its books. Notably, Citigroup stands out among these banks as having the least growth in its loan portfolio over the period shown here. In fact, the loan figure has fluctuated between $640-$660 billion – a result of the bank’s considerable geographical presence as the dollar value of the loans changes with marked currency movements. As a predominantly regional bank, U.S. Bancorp comes a distant fifth in the list with $240 billion in outstanding loans for the second quarter. Capital One, which grew its portfolio considerably in early 2012 due to its acquisitions of HSBC’s U.S. card business and ING Direct, is ranked sixth among these banks.

While there is a considerable difference in total outstanding loans for each of these banks – ranging from well over $900 billion for Bank of America to less than $200 billion for Capital One – the relative importance of different loan categories to each bank’s business model is apparent from the chart below, which shows the proportion of mortgage, credit card, consumer, commercial and CRE loans in each bank’s portfolio in Q2 2014.

It should be noted that the chart above shows only the loan proportions, and so cannot be used to compare the absolute size of loans handed out across banks. This can be better understood by the fact that while Capital One is clearly seen as having a larger focus on credit cards compared to the other banks here, its actual credit card loan portfolio ($77 billion) is much smaller than that of Citigroup ($143 billion), JPMorgan ($124 billion) and Bank of America ($100 billion). We will include a side-by-side comparison of the actual size of each loan category for the banks in subsequent articles.

In percentage terms, the banks that show a clear focus on a particular loan segment are Wells Fargo (with mortgages forming almost 40% of its portfolio), Capital One (with a 40% contribution from credit card loans), JPMorgan and Citigroup (both of which have commercial loans making up 38% of their portfolio). Bank of America’s loan portfolio is different from the others because two segments – commercial loans (38%) and mortgages (37%) – make up three-quarters of the total size. But while the bank’s commercial loan portfolio has seen rapid growth over recent years, the mortgage portfolio consists of billions in faulty loans it acquired from Countrywide and has shrunk in size nearly every quarter since the economic downturn. As for U.S. Bancorp, commercial loans form a higher percentage (32%) of the banks’s portfolio compared to mortgages (29%) despite its aggressive growth in the mortgage industry in 2011-2012, when the demand for mortgage refinancing spiked. The regional bank has shifted its focus on commercial lending over recent years to make up for the shortfall in mortgage lending volumes.

With the demand for mortgages slowing down, the share of these banks’ portfolios made up by mortgages can be expected to decline slightly over coming quarters. While commercial banks will most likely continue to grow at a steady rate, higher discretionary spending is expected to drive a faster growth in card loans and consumer loans in the near future.

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Notes:
  1. Selected Assets and Liabilities of Commercial Banks in the United States, Federal Reserve Website []