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Bank of America Corp (BAC), Wells Fargo & Co (WFC): Here’s Why the Business Loan Boom May Be the Next Bust

As the news that mortgage lending is heading into slow mode sinks in, reports that commercial and industrial lending is on the upswing seems like a ray of sunshine. Relaxed lending standards are causing somewhat of a boom in this area — which seems to bode well for both Federal Reserve policy as well as the overall economy. After all, quantitative easing is all about creating an environment that is hospitable to lending, and businesses that borrow usually use the money to expand and — hopefully — hire more workers.

But there is a dark side to this ramping up of C&I activity: risk. With competition for these loans at an all-time high, banks are stretching guidelines and dropping interest rates — both possible harbingers of problems in the future as margins become squeezed further, and these low-rate loans become unsustainable once interest rates begin to climb.

More loans, less profit
While the move into the C&I sector has been going on for some time, it has been becoming more dicey as of late. A recent Fed survey of bank loan officers shows that 65% of banks have relaxed commercial lending standards, while reporting no such easing of their residential lending terms. In addition, 33% are including fewer clauses in these loans, which would protect the lender in cases of default.

Bank of America Corp (NYSE:BAC)

The nation’s biggest banks are jumping head-first into this market, with large regionals not far behind. Bank of America Corp (NYSE:BAC), for example, recently announced that it is bulking up its own C&I department in an effort to take on rivals JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC). Less than one month ago, the head of Bank of America Corp (NYSE:BAC)’s Baltimore, Md., market noted that pumping up business lending in that area is a top priority.

JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC) aren’t holding back, either. The biggest U.S. bank just made a huge push into the Charlotte, NC market — Bank of America Corp (NYSE:BAC)’s home base. The open house for its new C&I lending facility will commence this week, immediately following the bank’s annual meeting. For its part, Wells Fargo & Co (NYSE:WFC) saw its commercial lending increase by 12% last year, as it courts the business of entrepreneurs previously too skittish to make improvements in their facilities.

Large regional banks have been getting in on the act, too. KeyCorp (NYSE:KEY), Huntington Bancshares Incorporated (NASDAQ:HBAN), and Fifth Third Bancorp (NASDAQ:FITB) all boosted their commercial loan portfolios last year between 18% and 20%.