5 Banks Stocks Profiting on the Most Profitable Loans (Update 2)

Updated with market close and total return information.

NEW YORK (TheStreet) -- Many banks are trying to grow their commercial and industrial loan books, which is of prime importance to investors as other loan balances continue to shrink.

"Banks covet C&I loans because it is the area showing the earliest growth as we emerge from the recession," says Jefferies analyst Ken Usdin, "and many banks that previously had commercial real estate loans concentration are looking to remix their loan portfolios.

Usdin says that non-real estate commercial and industrial loans are "generally more of a variable rate product, so a lot of banks are hoping that when rates eventually go up, they will benefit from expanded net interest margins, as the loans adjust to higher rates."

The net interest margin is the difference between a bank's average yield on loans and investments and its average cost for deposits and borrowings. While many banks are seeing solid growth in non-interest bearing checking account deposits, net interest margins are still being pressured by the prolonged low-rate environment. Growing C&I loan balances and building varied relationships with the borrowers -- including business checking accounts, for example -- is very important for banks preparing for the eventual rise in interest rates.

Usdin on Wednesday highlighted a number of community banks showing impressive C&I loan growth, although it is probable that "some was spurred by seasonality" and the expiration of capital expenditure tax credits. "As such, we would expect the pace of loan growth to be lower in 1Q," he said.

Among the largest banks in the Jefferies coverage universe growing commercial loans, Comerica (CMA) of Dallas stood out, with C&I loan growth of 8% during the fourth quarter, to $25.0 billion as of Dec. 30, while total loans grew 3.5%, to $42.7 billion.

Usdin said that "growth in C&I led the way as CMA experienced a strong quarter in its dealer finance and mortgage banker businesses," but that Comerica's "forward guidance is fairly cautious given the company is only calling for 2%-5% average loan growth in 2012."

The analyst rates Comerica a "Hold," with a $28 price target, and estimates the company will earn $2.40 a share in 2012, followed by EPS of $2.50 in 2013.

Comerica's shares closed at $29.47 Wednesday, returning 14% year-to-date, following a 38% decline in 2011.

Interested in more on Comerica? See TheStreet Ratings' report card for this stock.

Another large regional player showing strong fourth-quarter commercial loan growth was KeyCorp (KEY) of Cleveland, with C&I loans increasing 7% during the fourth quarter, to $19.4 billion, as of Dec. 30.

Usdin said that the company's "loan growth continues to build, as strength in C&I has outpaced run-off from exit portfolios," and that although the company's wind-down of certain loan types "will likely a put a cap on overall growth potential," the company "has beaten most expectations for total loan growth to return to positive territory."

The analyst has a "Hold" rating on KeyCorp, with an $8 price target, and estimates the company will earn 70 cents a share in 2012, followed by EPS of 75 cents in 2013.

KeyCorp's shares closed at $7.90 Wednesday, returning 3% year-to-date, following a decline of 12% in 2011.

Interested in more on KeyCorp? See TheStreet Ratings' report card for this stock.

The following are the five banks covered by Usdin showing the strongest fourth-quarter growth in commercial and industrial loans:

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