Banks Open Loan Spigot Uptick in Lending to Businesses Is Expected to Accelerate Next Year

By The Wall Street Journal Online

Some big U.S. banks are starting to increase their lending to businesses as demand for loans rises and healthier banks seek to grab customers from weaker rivals.

After declining steadily for most of the past two years, the amount of commercial and industrial loans held by commercial banks inched upward during the past two months, according to the Federal Reserve.

Moody’s Analytics estimates that commercial and industrial lending in the fourth quarter has grown 0.2% from the third quarter, to $1.22 trillion, the first quarterly increase in two years. Moody’s predicts such lending will rise 3% next year.

An uptick in business lending is an optimistic sign for the economy and can help to make the recovery self-sustaining. Such loans likely will be used by businesses to expand their operations, which could lead to new jobs and eventually to increased borrowing and spending by hired workers.

Until recently, a chronic lack of lending to businesses was seen by economists as one of the obstacles to healthy recovery. Commercial and industrial lending “is the last thing that turns in a business cycle,” said Mark Zandi, chief economist of Moody’s Analytics.

At J.P. Morgan Chase & Co., loans outstanding to “middle-market” companies—those with revenue between $10 million and $500 million—have increased 7% this year, with the sharpest growth in the third and fourth quarters, the bank said. Its lending to small businesses is up more than 40% in 2010.

At U.S. Bancorp, commercial loans outstanding increased 0.7% in the third quarter from the second quarter, the first gain since the end of 2008, and are on pace to increase by twice that amount in the fourth quarter, according to the lender.

The Minneapolis-based bank has begun taking “prudently larger positions” in loans from multiple lenders that are being refinanced by existing customers, said Richard Payne, vice chairman for wholesale banking. He said U.S. Bancorp has taken business from competitors that ran into trouble during the credit crisis.

Coming off the dramatic lending drop after the crisis struck, these increases are modest. The amount of business loans outstanding remains well below historical levels.

In addition, new activity varies significantly from bank to bank and industry to industry.

Still, the uptick is notable, say banking analysts. Whereas the crisis forced banks to tighten lending standards and focus on restructuring problem loans, “as banks get healthier, they get more rational and reasonable about normal risk taking,” said the CEO of J.P. Morgan Chase’s commercial bank, Todd Maclin.

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