Wells Fargo research note on Bank loans to AI

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WFC has issued a research note where they were highlighting some banks will see C&I loan growth from AI, DC buildout and how that will drive their EPS growth.

Few points captured my attention:

  • While capex as % of GDP is relatively stable over time, Tech capex used to be under 2% in 80’s is steadily increasing and now at 5% of GDP. This is higher than dotcom bubble (4% of GDP), post bubble it dropped to 3%.
  • There is a regional bias in DC buildout!
  • 10% of C&I loans are directly AI-driven and when you add adjacent companies it comes to 17%
  • Hyperscaler Capex is 50% higher than the forecasts; It is increasing every quarter; (Banks were earning higher fee income from equity and debt issuance, it is evident in big 4 bank results)
  • $190 B of debt is issued in 2Q 2026; This pokes a hole in the thesis, this time the AI buildout is not credit driven; Separately the big four captures almost 2/3rd of issuance (investment bank/ market fees)
  • AI Capex boom is trickling into industrial capex; 2nd, 3rd derivative capex
  • CRE (retail, warehouse, office and lodging) is a headwind; CRE is just getting out of its troubles; There are signs of CRE market reviving;
  • C&I Loans are booming
  • Few quotes
    • GS:

“All the indicators we have is that we are in the relatively early innings of a very significant… AI build-out cycle.”… “We are in the middle of an AI capex super cycle, where there are demands on financing into every single financing instrument in every region of the world and across every single industry.”

My Comments:

  • This cycle will come to an end with rate hikes; not gentle 1/4 point hikes, but sharp increased a la 2022
  • When AI capex bubble bursts, it is not just AI, tech, but many industries will be impacted directly and indirectly;
  • Banks will take a significant hit to their earnings (fee income) and some write down in loans (specifically regional banks)
  • Except UST, even fixed income of big corporates will be impacted;
  • We are going to have continued growth for few more quarters; So you need to keep dancing until the music stops; Trying to stay out resulted in missing out opportunity to earn significant returns; But the potential impact to the non-AI portfolio is not minimized either. So you are not making money, but carrying the risks…
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