Sunday, April 25, 2010

Small Business Credit Shifting Away from Traditional Bank Loans to Credit Cards

It is difficult to get timely data on small business loans outstanding. Banks are only required to break out small business loans from overall commercial loans once a year, in their June call reports. Although the information is several months old, looking at data from 2008 to 2009 shows a continuing shift away from traditional loans and lines of credit toward small business credit cards.

Banks have found that using traditional underwriting methods for smaller loans is not cost effective. These banks have turned to small business credit card automated decisioning tools to cheaply process credit applications.

As shown in Exhibit 1, overall small business loans outstanding fell only 4% from 2008 to 2009, but the number of loans outstanding fell almost 19%. (Click on image to enlarge)

Does this make sense? Actually it does if you think about the buzz about banks cutting back on credit cards, and especially the demise of Advanta, a leading small business credit card issuer. Small loans less than $100,000 are predominately issued through small business credit cards and represent almost 50% of total loans outstanding but more than 95% of total volume.

Also looking at Exhibit 1, you can see that large and medium small business loan dollars and number outstanding have held steady, while banks have strongly contracted the number of micro loans outstanding. Yes, Virginia, banks are restricting lending on credit cards.

Monday, March 22, 2010

Euro Area Commercial Loans Continuing to Decline Slightly

In stark contrast to the United States, the Euro Area saw only a slight decline in commercial loans outstanding in 2009 into early 2010. As shown in Slide 1, data from the January 2010 European Central Bank Monthly Bulletin shows a reduction in short-term loans in favor of medium to longer term loans. Loan demand is down overall due to a reduction in inventory investment and merger & acquisition activity. This reduction is offset by enterprises locking in long term funding at lower interest rates. (Double click on image to enlarge.)
As shown in Slide 2, the European Central Bank Lending Survey highlights a continued easing of credit standards for enterprises of all sizes since their peak in late 2008. This easing is driven by supply-side factors, such as banks’ access to market financing and banks’ liquidity position. The impact of capital costs dampened easing of credit standards. Loan demand by Euro Area enterprises is improving slightly from its trough in January 2009.
Although improving, weakness in loan demand results from weakness in fixed investment and merger & acquisition activity. Demand from SMEs (small to medium enterprises) is greater than large firms because of large firms’ access to alternative forms of financing such debt securities and equity issuance.

Tuesday, March 9, 2010

Crying Wolf? The Statistics behind the Growing Concern about Commercial Lending Credit Quality

A Congressional watchdog group reported recently that over the next few years, a wave of commercial real estate loan failures could threaten the U.S. financial system, and in the worst-case scenario, hundreds of additional community and mid-sized banks. FDIC Chairwoman Sheila Bair recently told reporters that “Troubled institutions are now at extremely high levels; 702 institutions or almost 1 out of 11 are troubled. These institutions are likely candidates to fail over the next 6 to 12 months.” Also, "This year, the losses are going to be heavily driven by commercial real estate, we've known for some time and we have been projecting that."

Recent FDIC Statistics on Banking support the concerns about commercial real estate (CRE) losses, and more broadly, commercial and industrial loan losses. The chart below shows the percentage of noncurrent loans and net charge-offs as a percentage of total loans.

Little attention is being paid to commercial and industrial (C&I) loan problems. Outstanding C&I balances at US commercial banks exceed CRE balances. Bad C&I loans increased 517% from 2006 to 2009. During the same period, bad CRE loans increased 608%.

Four banks failed last week, bringing the 2010 total to 26. Commercial real estate problems were cited in many of the closures. A slow economic recovery, coupled with continued high unemployment, supports the National Association of Realtors’ prediction that there will not be any meaningful recovery in commercial real estate before 2011.