Regional banks are getting a boost as the AI gold rush spills out beyond Wall Street.
Activity among manufacturers, equipment suppliers, and other large and midsize firms that borrow from regional banks is heating up. That’s adding to investor hopes that regional lenders with sizable commercial banking arms have another growth stream, even if they are largely sitting out of the data center financing boom.
The State Street SPDR S&P Regional Banking ETF (KRE) traded near a record high earlier this week. Since the start of the year, it has climbed 17%, outperforming major stock indexes.
Demand for commercial and industrial loans strengthened in the second quarter. A net 16.1% of banks reported higher demand from large and midsize companies, up from 4.8% in the previous quarter, according to the Federal Reserve’s senior loan officer survey.
Bank loan officers said increased investment in plants and equipment and greater financing needs for inventories were among the reasons companies were borrowing more.
PNC (PNC) CEO Bill Demchak told analysts last month that his bank was seeing unusually broad commercial loan growth.
“For the first time I can remember, we had strong growth across kind of every category inside of the C&I franchise and utilization increases,” Demchak said.
AI is affecting lending activity at the margin, he added, but “it’s too broad-based to lay it all on AI.”
Last week, US manufacturing activity hit a four-year high, marking the seventh month of expansion after three years of contraction, according to the July ISM manufacturing index. A few respondents in the survey noted tailwinds from the AI infrastructure build-out.
Wells Fargo analysts indicated that the dynamic is a “trickle down effect” of massive capital spending on AI infrastructure. That has increased demand for everything from electrical equipment and power to natural gas and construction materials.
Fifth Third Bancorp (FITB) CEO Tim Spence said in an interview last month that his bank has largely avoided financing data center construction. Instead, the company lends to firms that sell concrete, aluminum, HVAC, and other construction services. It also finances manufacturers of heavy machinery, like cranes, tractors, and backhoes.
Those businesses are benefiting from rising investment in both AI and defense spending, along with broader infrastructure investment from Biden-era legislation, Spence said.
“You have all three of those things impacting people who make stuff … and that is our market,” Spence said.
Still, the lending pickup is far from a sure bet.
Wells Fargo cautioned that higher-for-longer interest rates could limit borrower demand, while AI spending could crowd out the US economy’s other capital investing activity.
And even if loan growth keeps accelerating, the economics might become less attractive.
In the second quarter, loan yields fell at 22 of the 29 banks Morgan Stanley studied. Its analysts warned this week that banks looking for faster loan growth may need to pay more for deposits to fund it, while competition is already squeezing loan yields.
David Hollerith covers a range of developments throughout the financial sector, from Wall Street to banking and asset management to crypto and fintech. Email him at david.hollerith@yahoofinance.com. Follow him on X at @DsHollers.
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