Commercial loans slideshow updated with new upgrade on BB&T.

NEW YORK (

TheStreet

) -- It appears that a combination of lower interest rates and stiff competition between banks has made commercial and industrial loans cheaper for businesses.

Several banks reported solid growth in the commercial and industrial lending segment during the second quarter, although overall loan growth remained muted as loan balance continue to shrink.

Banks have, however, seen the yields on their commercial loans decline, as heightened competition is pressuring lending rates. Moreover, the decline in short-term interest rates has also affected the pricing of variable loans.

This, even as earlier loans made at higher interest rates get renewed at lower rates.

According to the Federal Reserve's Terms of Business Lending data, the average lending rate for commercial loans by banks during the first week of May was 3.44%.

The April 2011 Senior Loan Officer survey also found that banks continued to ease standards and terms for C&I loans. The majority of respondents that had eased standards and terms on C&I loans cited increased competition from other banks and nonbank lenders as the most important reason for the easing.

Some banks that had eased standards and terms also pointed to a more favorable or less uncertain economic outlook.

Large and middle market firms have been the biggest beneficiary of this trend, with banks yet to report stronger loan growth in small businesses.

For banks, the rebound in business loans bodes well, but analysts are worried that they may be unable to grow their commercial loan portfolio without hurting margins or worse, lower credit standards.

Regional banks tend to have a bigger exposure to the commercial and industrial lending segment. Here are five regional banks identified by BMO Capital Markets that saw a sequential decline in commercial loan yields.

5. BB&T

North Carolina-based

BB&T

(BBT) - Get Report

reported second quarter-earnings that beat expectations on the back of continued credit costs decline.

The company reported second-quarter net income available to common shareholders of $307 million, or 44 cents a share, compared to $225 million, or 32 cents a share in the first quarter and $210 million, or 30 cents a share, in the second quarter of 2010.

BB&T's net interesting margin -- the difference between the bank's average yield on earning assets and it average cost for deposits and borrowings -- increased to a solid 4.15% during the second quarter from 4.01% the previous quarter,. Management projected that the margin will remain in the 4.05% to 4.10% range throughout the remainder of 2011, driven by "lower yields on loans, a less favorable asset mix and a slightly higher cost of long-term debt."

Average total loans and leases held for investment, excluding the impact of loan runoff, increased 3.4% on an annualized basis. Average commercial and industrial loans increased an annualized rate of 2.6% during the quarter. New C&I production was up an annualized 10% compared to the first quarter.

Loan yield decreased 3 basis points versus the third quarter. However, yields on commercial and industrial loans declined by a steeper 10 basis points to 4.25% from 4.35% in the first quarter.

During the earnings conference call, management acknowledged pricing pressures in the middle market segment and also said they were beginning to see structural issues developing in and around tendering term and other deal structure issues. The bank, however, said that it was "choosing not to participate in those areas."

Rochdale Securities analyst Richard Bove recently

upgraded the stock to a buy with a price target of $34, touting the bank's growth in earning assets and its new products that would recapture lost fee income due to new regulatory restrictions.

Shares are down 0.8% year-to-date. 10 analysts rate it a buy, 22 analysts a hold and 5 analysts a sell or underperform.

4. Fifth Third Bancorp

Cincinnati-Ohio based

Fifth Third Bancorp

(FITB) - Get Report

joined the regional banking beat parade in the second quarter, reporting net income of $328 million, or 35 cents a share, increasing from to $88 million, or 10 cents a share in the first quarter and $130 million, or 16 cents a share, in the second quarter of 2010.

The bank said net interest income and spreads were down modestly due to a "flatter yield curve and heightened loan pricing competition." The net interest margin in the second quarter was 3.62 %, a decrease of 9 basis points from 3.71 % in the previous quarter.

Yields on commercial loans fell 10 basis points on a sequential basis to 4.35% from 4.45%. The bank said investment of excess cash reduced C&I loan yields by 6 basis points, while loan balances repricing at lower rates was another reason.

However, the pricing for new loans seems to be stabilizing for the bank. Origination yields and spreads improved in June, the bank said in a conference call. "Much of the new borrowing activity that has characterized the recent quarters has been in the upper end of our portfolio. Both in terms of size, as well as credit quality."

Commercial and industrial (C&I) average loans increased 2 percent sequentially and 7 percent compared with the second quarter of 2010.

"C&I production continues to be strong, although we're still seeing high levels of paydowns. We've seen broad-based growth across a number of industries and sectors with particularly strong production within the manufacturing, healthcare and wholesale sectors. Given our strong levels of production and the strong pipelines, I expect we'll see similar growth in the second half of the year.," the bank said in its investor presentation to analysts.

Shares are down 11.4% year-to-date. 18 analysts rate it a buy, 13 a hold, while only one analyst has a sell rating on the stock.

3. KeyCorp

Cleveland, Ohio-based KeyCorp comfortably beat analyst estimates, with net profit from continuing operations for the second quarter jumping to $243 million or 26 cents per share, compared to $56 million, or 6 cents per share, in the corresponding previous quarter. Revenues fell 8.2% to $1.02 billion, although the bank said it improving loan growth in its commercial and industrial lending segments.

Commercial and industrial loan portfolio, increased 3.7% from the previous quarter. The increase was driven by activity in the industrial and REIT sectors, as well as increases in middle market lending all of its geographic regions. "Based on what we are hearing from our corporate clients, as well as lower runoff from our exit portfolio, we expect to reach an inflection point in total loans during the second half of this year and we will be poised again for growth," the bank said in the conference call.

Net interest margin declined to 3.19% from 3.25% in the first quarter. Yields on commercial, financial and agricultural loans dropped 20 basis points to 4.13% from 4.33% in the previous quarter.

The 20 basis points in commercial loan yields was accounted for partly by the impact of swaps and a decline in short-term interest rates . However pricing pressures contributed to a significant part of the drop.

KeyCorp told analysts during the conference call that it expects pricing pressures to continue as even the structure of loans is getting aggressive.

FBR analyst Paul Miller remains a little skeptical of the bank's ability to grow loans. "We note that the company's commercial, financial, and agricultural portfolio grew this quarter and the company believes overall loan balances have stabilized; however, we wonder about the sustainability of loan growth in a sluggish economy. Until the company demonstrates that it can grow core earnings and expand its loan portfolio while controlling expenses, we are hesitant to recommend shares," the analyst wrote in a note.

Shares are down 5% year-to-date. Seven analysts rate the stock a buy, 21 a hold and 3 a sell or underperform.

2. SunTrust Banks

Atlanta-based

SunTrust Banks

(STI) - Get Report

reported a profit of $178 million or 33 cents a share, up from a profit of $12 million or a loss of 11 cents from a year earlier. Revenue increased 1.8% to $2.2 billion.

The net interest margin, after expanding for 8 consecutive quarters, stabilized at 3.53%. The bank expects margins to decline further as loans mature

Commercial and industrial loans increased by $1 billion or 2% and was a bright spot in the revenue picture.

"A decline in SunTrust's higher-risk portfolio (construction and mortgage) of loans should begin to slow down in the coming quarters, allowing the company to report net loan growth in 2H11," Terry McEvoy of Oppenheimer notes.

RBC Capital has an outperform rating on the stock due to the" currently low valuation and 2012 outlook"." Credit trends, core deposit growth, and stable average loan balances continued to move in the right direction," analysts wrote in a note. RBC has a price target of $33 on the stock.

Shares are up 3.6% year-to-date. Ten analysts have a buy or outperform rating on the stock, 20 analysts have a hold rating while 4 analysts have a sell.

1.Huntington Bancshares

Columbus, Ohio-based

Huntington Bancshares

(HBAN) - Get Report

beat analyst expectations with a net income of $145.9 million, or 16 cents a share, compared to $126.4 million, or 14 cents a share in the first quarter and $48.8 million, or three cents a share, in the second quarter of 2010.

Total loans were $38.5 billion as of June 30, increasing 4% from June 2010. Key growth areas were commercial and industrial loans, which totaled $13.4 billion and increased 8% year-over-year, and automobile loans, which were up 28% to $6 billion.

"Our C&I portfolio is expected to continue to show meaningful growth with much of this reflecting the positive impact from strategic initiatives to expand our commercial lending expertise into areas like specialty banking, asset based lending, and equipment financing, in addition to our long-standing continued support of small business lending," management said in its guidance.

Yield on commercial loans fell to 4.31%* from 4.57% in the first quarter. Absent the impact of swaps, yields only declined by 1 basis point this past quarter despite a 6 basis point decline in LIBOR. Management said during the call that it was being mindful of not loosening its credit standards.

"Our pricing remains disciplined, that is- our C&I loan growth reflects our increased efforts of generating new loans, but this growth is not a result of discounted pricing."

Analysts however remained divided on its prospects . Guggenheim Securities analyst Jeff Davis raised his rating to a buy, with a price target of $7. Davis argued analysts were "disappointed in commentary regarding a softer macro view and pressure on yields due to competition and low reinvestment rates," though he added, "neither was a surprise to us."

Paul Miller at FBR cut his price target on the stock to $7 arguing that "the company is having trouble growing revenues with the economy still sluggish and low interest rates weighing on its ability to grow the balance sheet at attractive risk-adjusted spreads."

Shares are down 12% year-to-date. 13 analysts rate it a buy, 8 a hold and 2 a sell.

--Written by Shanthi Bharatwaj in New York

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