Weak Demand For Mortgages, Commercial Loans Weighs On Overall Loan Growth In The U.S.

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The demand for commercial and industrial loans in the U.S. has largely stagnated over the last four quarters – making it more difficult for U.S. banks to grow their loan portfolios even as they contend with poor mortgage activity levels over the last three years. Commercial lending has primarily been hit by the Fed’s ongoing interest rate hike process, as individuals and corporates have sought to raise cash for business needs through the debt capital market rather than relying on bank credit.

However, the commercial real estate (CRE) lending activity stands out as a key growth area for the banks, as it continues to grow at a faster rate than any other loan category – a trend that has been seen since late 2012. Wells Fargo, the largest player in the U.S. CRE lending space, has relied on this strong growth over the last few quarters to partially mitigate the impact of poor loan growth for its retail banking business in the aftermath of its account fraud scandal. We maintain a price estimate of $56 for Wells Fargo’s shares, which is slightly ahead of the current market price.

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* Credit card loans include unsecured revolving credit, while retail loans include auto loans, student loans and other secured consumer loans. Other loans include loans to financial institutions as well as the lending of federal funds and reverse repurchase agreements.

As shown above, mortgages, commercial loans and CRE loans now represent roughly equal parts of the total portfolio of loans across U.S. banks (~22%). The U.S. banking industry grew by just 3.5% between Q3 2016 and Q3 2017 – well below year-on-year growth figures in excess of 10% seen nearly each quarter over 2014-16. CRE loans grew the most for this period (7.5%), while depressed mortgage activity resulted in outstanding home loans increasing by just 1.5% year-on-year.

The chart below captures Wells Fargo’s portfolio of outstanding commercial & industrial loans and includes our forecast for these loans. You can see how changes to these loans affect our estimate for the bank’s shares by modifying this chart.

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