Are Bank Commercial Loans Finally Rebounding?

Banks’ sluggish commercial loan portfolios are showing some signs of life, though whether the uptick will be durable is a major question as banks start reporting their quarterly earnings. 

Commercial and industrial (C&I) borrowers have expressed more interest in tapping banks for credit, bank CEOs say. While the data has yet to signal a firm rebound, analysts say banks’ stronger pipelines could bode well for loan growth the rest of the year and into 2026. “It feels good today. We’ll see if it holds,” says Stephen Scouten, a bank analyst at Piper Sandler & Co.

The outlook is far from exuberant, and a revival of U.S.-China trade tensions could dampen any momentum. Even so, the makings of a C&I rebound seemed evident as the quarter came to a close, with businesses getting more certainty to make longer-term investments.

Smaller banks were set to notch their second consecutive quarter of C&I loan growth, according to a Barclays analysis of Federal Reserve data. The increase was small at 0.6%, but it marked a shift from the start-and-stop dynamic of earlier quarters, the analysis shows.

“Loan growth should be a largely positive story for the mid-cap banks,” wrote Jared Shaw, a Barclays analyst who covers midsize institutions, in a note to clients. 

Some banks are seeing quite a bit of momentum, says Chris Marinac, a bank analyst at Janney Montgomery Scott, with unfunded C&I commitments rising over 15% at a few dozen institutions that focus more on the sector. “I really think the economy is in decent shape,” he says.

Resurgence of Optimism
If a rebound does come, it would follow a tepid few years in banks’ C&I portfolios.

Businesses were reluctant to borrow in 2022, when decades-high inflation and rising interest rates made borrowing more costly. In 2023, the failure of a few large regional banks put much of the industry on the defensive — enabling the rise of private credit as some banks took a back seat in lending. Then last year, businesses were holding off on big decisions until the 2024 elections.

The corporate world had big expectations for 2025, but Trump’s tariff announcement in April threw a wrench in planning. Months out, however, some of the steepest tariffs had been avoided — and bankers say companies are finding ways to deal with those that are in place.

Businesses displayed an “awful lot of optimism” in a recent survey that Evansville, Indiana-based Old National Bancorp conducted of clients, CEO Jim Ryan said at a Barclays conference last month. “Whether it’s through price increases or changing supply chains or just thinking about the business, they’re accustomed to dealing with and overcoming these obstacles,” said the CEO of the $71 billion bank. “I feel like a vast majority of our clients are feeling more optimistic this year over last.”

Boston, Massachusetts-based Eastern Bankshares, with $26 billion in assets, has seen a “resurgence of optimism among our business clients,” CEO Denis Sheahan said at the conference.

Not Out of the Woods
One sign of economic resilience: newly revised data showing U.S. GDP grew at an annual rate of 3.8% in the second quarter, following a pre-tariff import surge that had caused GDP to contract 0.6% in the first quarter. A reversal of those import pressures helped raise GDP in the quarter, but strong consumer spending also gave an extra push. Other data suggests some recent weakening, however.

Private-sector jobs fell by 32,000 last month, according to the latest report from the employment firm ADP. Due to the federal government shutdown, the official monthly jobs report for September wasn’t released on the first Friday of the month as scheduled.

Plus, a trade war heated up this week between the White House and China, with new tariff threats from the White House and restrictions on rare earth minerals from China. Even before the tariff news, the uncertainty among businesses hadn’t fully faded either, says Doug Farren, the managing director of the National Center for the Middle Market at The Ohio State University. That’s particularly the case among manufacturers, construction firms, retailers and others that rely more heavily on imported goods. 

“We’re still seeing a cautious, defensive posture,” says Farren, whose most recent survey found a significant drop in investment appetite.

Steep Competition
The rise of private credit firms may also dampen loan momentum at some banks, as some lose out on deals, says Brett Rabatin, head of equity research at Hovde Group. “Competition is fierce,” Rabatin says, with banks and nonbank lenders who are sitting on large pools of cash all fighting for a slice of the loan-growth pie.

Private credit firms swelled to some $1.6 trillion in assets under management at the end of 2023, according to a Treasury Department report last year, which defined that activity as nonbanks that lend directly to businesses. 

Heavy competition may drive down the rates that lenders charge to commercial borrowers or give them more flexibility, Rabatin says. Some banks may decide to give up some loan growth to stay firm on rates or loan terms, he says.

Others may pass on loans if a prospective business doesn’t choose them as their primary bank — bringing over their deposits and key fee-income services such as payment needs. “A lot of banks are looking for C&I loan growth, but they’re also wanting to make sure they can be a primary bank,” Rabatin says.

Sign of Hope
New regulatory data is helping shed more light on banks’ exposures to nonbank lenders. Banks with over $10 billion in assets now must report their lending to nondepository financial institutions (NDFIs) and reclassify their past loans from consumer and business to the new category. 

Larger banks make up about 90% of loans to NDFIs, according to analysts at Stephens. Their bigger exposures meant the reclassifications had a large impact, they wrote, with a previous increase in C&I loans turning negative while NDFI loans shot up.

Banks lost ground to NDFIs in commercial lending as companies sought faster loan closings and lighter loan covenants, Truist Securities analyst Brian Foran wrote in a research note last month. But some of the lopsidedness in the data is starting to even itself out, he added, with NDFI loans making up 38% of banks’ year-to-date growth compared to 52% last year.

“We admit that nonbank lending is still growing sharply but there is sign of hope that banks can start to win back some lost ground if the current trend continues and the private debt wave wanes,” Foran wrote. 

Some banks are still shunning NDFIs, but others are stepping up to the plate, says Marinac, of Janney Montgomery Scott. That’s because even if private credit funds are taking larger loan shares, the businesses they lend to still have deposits, payment needs and other banking needs, Marinac notes.

“The private equity funds have no clue what that is, so let the banks do what they’re good at,” Marinac says, adding that the cooperation can be very healthy for the industry.