Big banks are allocating more to private credit

Big banks are allocating more to private credit
Goldman, Citi, Wells Fargo among those increasing allocations.
MAY 31, 2024

Banking giants that once had the most ground to lose to the burgeoning world of private credit keep finding more ways — and much more money — to pump into the sector.

For years, the threat was that direct lenders would unseat incumbents by luring away clients and siphoning off corporate-loan business. Now, it seems the biggest US lenders have decided if they can’t avoid that competition, they will throw themselves into it. 

Banks including Goldman Sachs Group Inc., Citigroup Inc. and Wells Fargo & Co. have announced plans to cobble together more than $50 billion to plow into private credit in recent months, according to an analysis by Bloomberg. Some are offering investing clients more ways to wriggle into the action, with JPMorgan Chase & Co.’s asset management arm looking to scoop up a private credit firm, Bloomberg has reported.

“We cannot ignore it,” Daniel Pinto, JPMorgan’s president and chief operating officer, told investors this month. “We need to really embrace it, and make sure that we are properly positioned to participate in that market.” While many banks have pointed to multibillion-dollar efforts, there have been a range of approaches to seizing on the interest. Some firms have built upon long-established private debt franchises in their asset management units. Some have earmarked funds from their balance sheets. Some have partnered with other firms and will provide access to borrowers, or money, or both.

The deepening forays into private credit have the potential to leave banks competing with their own traditional lending desks. But in some cases, the banks may find it more profitable to earn fees by taking money from investors such as pension funds and insurers to fund loans, rather than agreeing to put up money themselves and run the risk of being unable to distribute the debt in the public markets.

The strategy also lets them offer borrowers another option rather than risk losing those clients to another lender.

To be sure, the sums are a drop in the bucket compared with the $1.7 trillion industry that private credit has become in recent years as asset managers like Blackstone Inc. and Apollo Global Management Inc. have flocked to the burgeoning asset class. 

'HELL TO PAY'

Even as they clamor to plow cash into private credit, a chorus of bank chiefs have begun to sound warnings about potential underlying dangers.

Citigroup Chief Executive Officer Jane Fraser warned at an event last month that there’s a risk to the growing number of insurers piling funds into direct lending opportunities. 

“We’re all aware of the risks,” Bill Winters, the CEO of Standard Chartered Plc, said at the same event to a room full of regulators. “Like always, good things go too far and then correct. And the job of us as banks and the job of you as supervisors is to make sure we don’t get carried out when the tide goes away.”

JPMorgan’s Jamie Dimon said he expects problems to emerge in private credit and warned that “there could be hell to pay,” particularly as retail clients gain access to the booming asset class.  

“Do you want to give access to retail clients on some of these less liquid products? Well the answer is — probably, but don’t act like there’s no risk with that,” Dimon said this week. “Retail clients tend to circle the block and call their senators and congressmen.”

LOW LOAN DEMAND

There’s growing evidence that banks are looking to win back some of the business they might have lost to direct lenders. Investment banks including Goldman Sachs are pitching broadly syndicated refinancings of some of the riskiest types of private credit, Bloomberg reported this month.

The funds being raised by the giants of Wall Street might face a lack of places to deploy the money. High interest rates have sapped borrowing demand across the US. Loan balances at the nation’s six biggest banks are expected to rise by less than 1% in the second quarter, according to analyst estimates compiled by Bloomberg.

Dry powder, or the amount of money committed to private credit funds that has yet to be deployed, is at a record. Already, investors are worried that will drive some fund managers to offer cheaper prices or adjust loan covenants to be more friendly toward borrowers.

“The demand for deals is very strong,” David Mechlin, a portfolio manager at UBS Asset Management, said this month. “But the need for credit is not there.”

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