Q1 2015 U.S. Banking Review: Total Loan Portfolio

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Capital One Financial

The first quarter of the year was a particularly strong period for U.S. banks, with data compiled by the Federal Reserve showing that total loans handed out by the country’s banking industry grew at an annualized rate of 8.1% over the quarter. ((Selected Assets and Liabilities of Commercial Banks in the United States, Federal Reserve Website)) This compares to growth figures of 5.3% for the year-ago period and 5.4% for the previous quarter. The prevailing low interest rates and growing optimism about the strength of the economy is primarily responsible for this positive trend, as they have coaxed individuals as well as businesses to tap into available credit lines. In fact, Q1 2015 was one of the best quarters in these terms since the economic downturn of 2008, and sets the stage for another year of strong loan growth. As has been seen over recent quarter, the growth will largely be fueled by the strong demand for commercial loans as well as personal loans (including automobile loans, student loans and other loans for discretionary-spending).

Although there is no doubt about the brisk pace of loan growth for the industry as a whole over recent years, the loans haven’t grown uniformly across banks. Some banks have reported growth in outstanding loans of 4-5% annually while others have hardly seen any improvement in these figures as they run off loss-making loans handed out before the downturn. Also, the growth rate for each bank 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 three years, and 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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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 was to jumpstart the country’s battered economy by encouraging individuals and businesses to take on fresh loans. The rationale behind this is straightforward – as individuals spend the money they borrow, the demand for products and services will increase, and businesses will use the credit extended to them to cater to this growing demand. The fact that the Fed has hinted at an increase in benchmark interest rates later this year after maintaining them at low levels for six years indicates that key economic metrics have recovered sufficiently for the central bank to consider raising interest rates closer to their historical levels.

The total outstanding loans for all commercial banks in the country is one of the key economic indicators that has shown marked improvement over the years. The total loan portfolio for U.S. banks fell from a pre-recession peak figure of $7.3 trillion in October 2008 to a low of under $6.5 trillion in early 2010, before the Fed’s efforts and improving economic conditions helped this figure jump to over $8.2 trillion now. [1]

A commercial bank’s total loans include mortgages, credit card loans, retail consumer loans (such as auto loans and student loans), commercial and 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 thirteen quarters. The data has been compiled using figures reported by individual banks as a 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 Q3’14 Q4’14 Q1’15
Bank of America 913.7 899.5 888.9 893.2 906.3 914.2 924.0 929.8 919.5 912.6 899.2 884.7 872.4
Wells Fargo 768.6 768.2 776.7 787.2 798.1 800.2 804.8 816.7 823.8 831.0 833.2 849.4 863.3
JPMorgan Chase 715.6 725.3 723.1 725.6 725.1 727.5 723.5 729.6 730.3 737.6 741.8 746.7 757.6
Citigroup 647.0 646.2 653.8 649.6 643.1 642.4 645.5 659.4 658.7 665.1 659.1 650.8 634.9
U.S. Bancorp 210.2 214.1 216.9 220.3 222.4 225.2 229.4 232.8 235.9 240.5 243.9 246.4 248.0
Capital One 152.9 192.6 202.9 202.9 196.0 190.6 191.2 192.8 193.7 195.0 199.4 203.4 205.2

Notably, Bank of America has a larger loan portfolio than any of its competitors, with an average of $872 billion in outstanding loans for the first quarter. The bank reported a sharp 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 shrank from roughly $450 billion in early 2010 to below $300 billion now. Renewed focus on its commercial lending business since late 2012 and rising demand from enterprises helped the bank increase its commercial loan portfolio from under $250 billion in early 2011 to almost $345 billion. As Bank of America continues to run-off its mortgage portfolio and to sell its branches in low-profit regions, its total loan portfolio has shrunk considerably over recent quarters.

Wells Fargo comes in second with a loan portfolio of almost $865 billion. Not surprisingly, mortgages accounted for the largest portion of this figure – $325 billion for Q1 2015, or almost 38% of all loans. The bank has been focused 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 on the list in early 2009, after it acquired Wachovia’s operations at the peak of the downturn. Although below-average demand in the mortgage industry has slowed down the rate of growth in this sector, Wells Fargo has more than made up for this by showing notable growth in its commercial lending as well as commercial real estate portfolios over recent years.

With $758 billion in loans, JPMorgan Chase comes in at the third position, followed by Citigroup with loans worth just under $635 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 around $650 billion – a result of the bank’s considerable geographical presence, as the dollar value of the loans changes with marked currency movements. The bank’s focus on shrinking non-core operations housed under the Citi Holdings division as well as to exit its banking presence in several countries in the recent past has also nullified the impact of organic growth in its loan portfolio over the years.

As a predominantly regional bank, U.S. Bancorp comes in a distant fifth on the list with $248 billion in outstanding loans for the first 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. The card-focused banking group saw a sizable reduction in its loan portfolio over 2013 as it cut down on acquired loans that it saw as non-strategic for future growth.

While there is a considerable difference in total outstanding loans for each of these banks – ranging from more than $850 billion for Bank of America and Wells Fargo 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 Q1 2015.

It should be noted here that this chart shows only the loan proportions, and so cannot be used to compare the absolute size of loans handed out across banks. To put things in perspective, while Capital One is clearly seen as having a larger focus on credit cards compared to the other banks, its actual credit card loan portfolio ($83 billion) is much smaller than that of Citigroup ($137 billion), JPMorgan ($125 billion) and Bank of America ($99 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 (39%) and mortgages (34%) – make up almost 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 (34%) of the bank’s portfolio compared to mortgages (28%) despite its aggressive growth in the mortgage industry when the demand for mortgage refinancing spiked in 2011-2012. Although the regional bank has shifted its focus on commercial lending over recent years to make up for the shortfall in mortgage lending volumes, it is well poised to gain from the increasing activity in the country’s mortgage industry over the years to come.

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