Commercial Real Estate Lending Growth Remains Strong Despite Fed Rate Hikes

by Trefis Team
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U.S. Bancorp
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The Fed’s ongoing interest rate hike process has had a negative impact on the rate of loan growth across U.S. banks over recent months, with individuals and corporates deciding against adding fresh debt at higher interest rates. While this trend is most visible for the commercial and industrial loan category, commercial real estate (CRE) lending activity has bucked this trend to grow at a faster rate than any other loan category.

CB_QA_USLoanBreakup_17Q1

* 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.

The U.S. banking industry grew by just over 5% between Q1 2016 and Q1 2017 – well below year-on-year growth figures in excess of 10% seen each quarter over most of 2014-16. Notably, CRE loans grew by almost 10% for this period, while depressed mortgage activity resulted in outstanding home loans increasing by a much lower 2.5% year-on-year.

CB_QA_USLoanChange_17Q1

The notable rate of growth for CRE loans can primarily be attributed to the fact that they are usually for a relatively short period (5-7 years compared to 30 years for residential mortgages) – requiring them to be refinanced at regular intervals. Given the Fed’s optimistic rate hike schedule of three rate hikes each year over 2017-2019, companies appear to have rolled over their CRE loans at current interest rates to avoid potentially higher rates a couple of months later. This would also mean that the elevated CRE loan growth rate is unlikely to continue for long, and that these loans should grow at much lower rates over subsequent quarters.

The chart below captures U.S. Bancorp’s portfolio of outstanding CRE 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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