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Structural and regulatory pressures will continue to dampen commercial credit, studies say.
Vincent Ryan, CFO.com | US
May 5, 2010
Lenders are traditionally slow to bankroll companies in the early stages of an economic recovery. But some recent studies say the drop in commercial and industrial (C&I) lending brought on by the credit crisis will persist — and that loan origination volumes will stagnate even as U.S. economic growth picks up.
The survey of banks, by Greenwich Associates and FTRANS, an accounts receivable outsourcing firm, showed that 86% of commercial banks are moving away from commercial real estate lending, which will still represent 46% of their loan books, toward higher levels of core C&I lending. Banks are forecasting that C&I loans will grow to 24.7% of their portfolios in 2010, from 22.5% last year. From 2008 to 2009, C&I loan books fell 8.5%, on average, as a share of banks' total loan portfolios.
So, far, though, there is little evidence of any expansion at the macro level. Indeed, U.S. banks' C&I books are still contracting. As of the end of March, C&I loans on banks' balance sheets shrank at an 18% annualized rate, according to the Federal Reserve's quarterly survey of senior lending officers, released Monday.
The Greenwich study suggests that there are "structural impediments" hampering banks from growing their C&I portfolios. For one, with banks focused on real estate lending for a decade, many bankers have little experience in C&I lending, which requires a different skill set. "I believe that's accurate," says John Millman, CEO of Sterling National Bank (N.Y.), a $2 billion-asset commercial bank. "Community and regional bank reliance on commercial real estate has been phenomenal. They lack the skill set to do asset-based lending, factoring, and leasing."
For another, small regional banks still lack centralized controls in underwriting, as well as sophisticated systems to understand collateral at the level of accounts receivables and inventories, Greenwich says.
But Bert Ely, an independent banking consultant, is skeptical of the structural-impediments argument. "The largest single impediment in the weaker banks is inadequate amount of capital," he says. "In the stronger banks, it's taking on credit risk that examiners are comfortable with." Moreover, C&I originations are down in part due to lower demand from creditworthy borrowers, Ely points out. "The stronger companies are the ones least interested in borrowing," he says.
But Millman says that trend is reversing. "We're starting to see the stronger companies borrow a little more actively," he says. "[In many cases] legitimate and reasonable credit requirements are not being met."
In the Federal Reserve survey, a net fraction of banks reported easing underwriting standards on C&I loans to large and medium-size businesses. Large domestic institutions were responsible for the easing, the Fed says; no small banks on the Fed's panel relaxed standards to large firms during the past three months. In contrast, there was little change in lending standards to small companies — indeed, many small banks reported tightening terms on C&I loans to this customer segment.
The Greenwich report coincided with a survey of financial executives by Grant Thornton that showed capital available but in smaller amounts and at higher interest rates. Almost half of the 250 executives said that the amounts banks are lending have fallen, and 55% said interest rates on borrowing have increased. Another 66% believe current regulatory-reform proposals will exacerbate the problem, increasing costs and encouraging capital flows to move overseas.
Competitive pressures may help to reverse the pricing trends. Senior lending officers at large domestic banks say they have trimmed the cost of credit lines and the spread they earn on C&I loans, according to the Federal Reserve survey. Increased competition from other banks or nonbank lenders was an important factor in the decision, the survey found.
But bank failures and consolidations will also winnow the field of competing U.S. financial institutions. A report by Greenwich Associates last week projected that up to 10% of U.S. banks will close or be acquired by the end of 2011. And in another five years, the number of banks in the United States may fall to 20% below 2007 levels. (So far this year, 64 U.S. banks have failed.)
"A lot of that is just consolidation," says Ely. "A company borrowing from a bank that fails has to secure credit from another source, and that can be a real problem. But it's just a transitional issue."
In New York City, Sterling's home market, many traditionally active C&I lenders have been rolled up into institutions that are focused on other products, says Millman. He points to North Fork Bank's acquisition by Capital One, the credit-card giant.