By Telis Demos

Once again, banks are struggling to expand their loan books. But they have an ace up their sleeve: lending to nonbank lenders.

Across several large, global, national and regional banks that have reported earnings so far, a common pattern is tepid loan growth. The year-over-year average loan growth at eight commercial banks -- ranging in size from JPMorgan Chase to First Horizon -- rounds to zero. Many are still shrinking their commercial real-estate loan books.

One area that is growing rapidly is lending to nonbanks, often through banks' trading units. These can be loans to hedge funds, but also to credit funds or financial companies that are themselves making loans to businesses or consumers. The banks lend to the lenders, and sometimes also help them then sell those loans to the market in the form of a securitization.

At Bank of America, average loans in the first quarter were up 4% from a year earlier. Lending in its consumer and global banking units grew just 1%. But it reported a 19% jump in lending within its global markets business.

Bank of America's finance chief, Alastair Borthwick, on Tuesday described the growth in global markets as "very diversified," and "across things like asset-backed and mortgage warehouse, and credit financing and subscription."

This is also a driver of higher revenues at banks' trading desks, in which revenue from this lending is often reported. Goldman Sachs said its so-called "FICC financing" business within its fixed-income trading unit hit a record in the quarter, citing "mortgages and structured lending" as drivers.

Subscription lines are used by private funds to borrow money against future commitments by their investors. They have used more financing as it has taken longer to sell down old investments and bring in new cash.

At Wells Fargo, overall lending was down 2% on average in the first quarter from a year earlier because the bank reduced its commercial real-estate lending. But lending through its markets business was up 21% year over year.

By financing lenders, banks are often enabling their competitors, the giant alternative asset managers that offer private equity and private credit funds.

For the biggest banks, this trade-off can often be worth it. Loans to financial companies can be lower-yielding, but are also heavily collateralized. So they carry lower risk in regulators' eyes. That frees up capital for higher-returning activities such as trading.

Traditional lenders, like many regional banks, aren't as fortunate because they don't have trading arms. They will face a bigger struggle to figure out how to be as profitable as they were in the past.

Write to Telis Demos at Telis.Demos@wsj.com

(END) Dow Jones Newswires

April 17, 2025 05:30 ET (09:30 GMT)

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