Friday, December 11, 2009

Update: Business Lending Performance by the Top 22 TARP Recipients

Over the past several days Obama, Geithner, and other Federal officials talked about a new Jobs program and extending TARP. With government programs in the news, I was reminded to update my data on lending activities by financial institutions who received capital infusions under TARP. Economic data continues to improve, but lending to businesses continues to decline. Over the past six months, business lending by the top 22 TARP recipients has decreased an average of 1.6% every month, with September (the latest data available) dropping 2.2% from August.

Since the beginning of monthly TARP reporting, commercial & industrial (C&I) loans outstanding declined 11.8% while commercial real estate (CRE) loans held steady.

Looking at new originations, originations for both C&I and CRE loans vary from month to month but the overall average ($48B) dropped slightly in the past few months.

The banks have broken out figures for small business loans (included in the overall totals) since April. From April to September, small business loans outstanding fell 3.7% while new originations have flattened out.

Unfortunately, the rate of decline in small business lending by the top TARP recipients is increasing; a bad sign for struggling small businesses.

Monday, November 30, 2009

Rising Commercial Loan Interest Rate Spreads -- Two Sides of the Coin

The US Federal Funds Rate continues to hover near zero, allowing banks to acquire funds for lending at historically low rates. But banks are spooked by record commercial loan delinquency and charge-off rates and have adjusted their interest rate spreads accordingly. The good news is that after a period of giving away commercial loans, lenders are being rewarded for the risks they take when lending money. The bad news is that commercial borrowers are facing the highest interest rate spreads since 2004. (Click on image to enlarge).

As seen in the accompanying graph, over the past two years interest rate spreads on commercial loans less than $1 million have increased approximately 30%. Throughout the early 2000s, as a result of intense competition from lenders, borrowers enjoyed narrow interest rate spreads on loans greater than $1 million. Those spreads have changed dramatically over the past two years, and spreads on large commercial loans increased almost 90%.

As discussed in my September 23rd blog post, rising interest rate spreads are a component of the continuing trend of tightening lending standards by US banks.

Tuesday, November 17, 2009

Commercial Lending by US, Canadian, and Euro Area Banks Continue Steady Decliine

Data from the Federal Reserve’s weekly sampling of 875 commercial banks for C&I and CRE outstanding balances shows continued steady decline in overall outstanding commercial loan balances. As shown in Slide 1, C&I and CRE balances have steadily declined every month in 2009, with an overall decline of 9.1% as of 11/04/09. Surprisingly, CRE loans have only declined about 5%, while C&I loans have declined almost 14%. (Double click on image to enlarge.)


Tightening credit conditions and the uncertain economic outlook in the United States continues to drive a decline in Canadian business lending. Looking at month-over-month data in Slide 2, business loans outstanding have declined 16.3%. Similar to the US, the decline in business mortgages is half that of the decline in non-mortgage loans (-7% vs. -17%).

The Euro Area’s slight decline in commercial loans outstanding continues. Overall loan demand is down due to a reduction in inventory investment and merger & acquisition activity. However, the month-over-month data in Slide 3 highlights a shift from shorter term loan maturities into longer term loans as a result of enterprises locking in long term funding at lower interest rates.

Wednesday, November 11, 2009

Business Bankruptcy Filings Continue to Rise in Lockstep with Unemployment

The United States business bankruptcy rate continues to be tightly correlated to the unemployment rate. As Exhibit 1 shows, business bankruptcy filings climbed an average of 12% per quarter from the 4th quarter of 2007 until mid-year 2009, compared to a 11% average quarterly increase for the unemployment rate over the same period. In the third quarter of 2009, the quarterly unemployment rate increase slowed considerably. (Click on slide to enlarge)


As the business bankruptcy rate is tightly correlated to the unemployment rate, expect a continued increase in bankruptcy filings until the unemployment rate improves.

Thursday, November 5, 2009

SBA Recovery Act Programs Finally Gathering Steam

On February 14, 2009, President Obama signed into law The American Recovery and Reinvestment Act of 2009 (Recovery Act). The Recovery Act contained a number of provisions intended to spur small business lending through SBA loan programs. After a slow start, there was a dramatic increase in new SBA loans granted under the 7(a) and 504 loan programs. A brief description of each of these programs follows:

Basic 7(a) Loan Guaranty: The 7(a) loan program is the most popular and flexible. Small businesses can use 7(a) loans for working capital, machinery and equipment, furniture and fixtures, land and building, leasehold improvements, and debt refinancing under certain conditions. Private commercial lenders provide 7(a) loans and determine whether to apply to the SBA for a guarantee during the loan underwriting process. The lender applies its own underwriting criteria when deciding to grant credit. In addition, the borrower and loan structure must also meet the SBA's eligibility requirements. Borrower requirements concern business size, eligible industries, use of proceeds, and availability of other funding sources. Loan requirements include amount, maturity, interest rate, percentage of guarantee, SBA fees, and prepayment penalties. As mentioned above, lenders often securitize the government-guaranteed portion of a 7(a) loan.

Certified Development Company (CDC), a 504 Loan Program: 504 loans provide long-term, fixed-rate financing to acquire real estate or machinery or equipment for expansion or modernization. Certified Development Companies (CDC) work with the SBA and private sector lenders to provide 504 loans to small business owners. A CDC is a nonprofit corporation set up to contribute to the economic development of its community. A 504 loan typically includes 50% financing from a private lender with a first lien position, 40% financing from a CDC funded by a 100% SBA-guaranteed debenture with a junior lien, and a contribution of at least 10% equity from the borrower. Because there is an active secondary market for 504 first lien position loans, banks can reduce their exposure on 504 loans to zero.

As shown in Exhibit 1, SBA Recovery Act lending was flat from June through August 2009. However, in September 7(a) loans increased 23% and 504 loans increased 81%. (Click on image to enlarge.)



It is not all that surprising that the 504 loan increase was triple that of the 7(a) loan increase. 7(a) loans are underwritten by private, commercial lenders looking focused on credit quality, loan covenant enforcement, risk-based pricing, and strong loan documentation. 504 loans are originated by nonprofit community organizations with the ability to securitize the 504 loans, reducing exposure on the loan to zero.

Monday, October 12, 2009

Business Lending Performance by the Top 22 TARP Recipients

Banks continue to be criticized for not using their TARP money to increase lending. In spite of a somewhat improving economy, it’s true that lending to businesses isn’t increasing, in fact, lending to businesses has declined more than 5% in the past six months. Looking at reports filed by the top 22 TARP recipients, from February to July commercial & industrial (C&I) loans outstanding declined 7.5% while commercial real estate (CRE) loans held steady. (Click on image to enlarge)


Looking at new originations, originations for both C and I and CRE loans vary from month to month but the overall average remains at $50B per month.

The banks have broken out figures for small business loans (included in the overall totals) since April. For the four month period between April and July, small business loans outstanding fell 1.5% while new originations seem to be trending upward.

Although the overall decline is small for small businesses, as a key component to the US economy, it will be important to monitor lending to this segment.

Thursday, October 8, 2009

Commercial Loan Delinquencies Increased 200% since 2007

As the banking industry prepares to release third quarter financials, I am taking a look at mid-2009 delinquencies by loan type and by bank asset size. The industry closely follows consumer delinquencies and much is being written about mortgage, auto, and student loan defaults. As shown in Slide 1, commercial & industrial (C&I) and commercial real estate (CRE) loans enjoyed rock-bottom delinquency rates in 2005 and 2006, encouraging lenders to increase commercial loans outstanding at double-digit rates. (Double click on image to enlarge.)

Commercial lending historically lags consumer lending in good times and bad, and these are bad times. In the 2nd quarter of 2009, almost 8% of US CRE loans were past due more than 30 days. This delinquency rate exceeds consumer credit cards and is approaching the delinquency rate for residential mortgages. Fewer than 4% of C&I loans are delinquent, but these loans have the highest percentage change since 2007—a 215% increase in past due loans.
Banks of all sizes are struggling with delinquencies and non-performing loans. Confirming the wide-spread belief that community banks made better lending decisions than the mega-banks, 2.7% of loans are non-performing at the smallest banks, compared to 4.6% at the largest banks. It’s interesting to note that prior to the credit crunch, banks across asset tiers had similar non-performing rates.

Unfortunately, C&I loans at smaller banks are not performing as well as other loan types. One could conclude from this data that as smaller banks ramped up commercial lending, they did not have the same underwriting expertise as larger banks, contributing to poor credit quality. Larger banks also benefit from stringent monitoring of commercial credits, allowing them to proactively address deterioration in the portfolio.
 

Friday, September 25, 2009

Euro Area Commercial Loans Holding Steady in 2009

In stark contrast to the United States and Canada, the Euro Area has only seen a slight decline in commercial loans outstanding in 2009. As shown in Slide 1, data from the July 2009 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.)

The month-over-month data in Slide 2, highlights the Euro Area’s shift from short term loan maturities into longer-term loans. In fact, as of July 2009, loans with maturities over 5 years are at their highest historical level.

As shown in Slide 3, the European Central Bank Lending Survey highlights an 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. Concerns over economic conditions continue to dampen easing of credit standards. Loan demand by Euro Area enterprises is improving slightly from its trough in January 2009.

Next week I will take a look at credit costs and credit quality.

Thursday, September 24, 2009

Canadian Business Loans Experiencing Dramatic Decline in 2009

After four years of double digit loan growth in Canada, outstanding business loans dropped dramatically in 2009. Tightening credit conditions and the uncertain economic outlook in the United States is driving the decline. Canadian businesses are facing significantly higher borrowing costs, tougher credit standards, and reduced credit lines. (Double click on image to enlarge)


Looking at month-over-month data in Slide 2, 2009’s Canadian decline has not been as steady as the decline experienced in the United States. Similar to the US, the decline in business mortgages is half that of the decline in non-mortgage loans (-8% vs. -16%).

As seen in Slide 3, the Bank of Canada Senior Loan Officer Survey (SLOS) shows similar tightening of credit conditions for Canadian businesses as we see in the United States. As in the US, the past two quarters are showing some easing in lending conditions. The SLOS reported tightened conditions are most prevalent in struggling industries such as automotive, forestry, and transportation.


The next posting will discuss business lending conditions in the Euro Area where lending has stayed steady throughout 2009. 

Wednesday, September 23, 2009

Commercial Lending by US Banks Steadily Declining Throughout 2009

After several years of double-digit growth in commercial lending, as of the 6/30/09 FDIC Call Reports, outstanding balances across major commercial loan types are collectively down 5.3%. Both commercial & industrial (C&I) and construction & land development balances are down about 9%. Surprisingly, commercial real estate (CRE) is up 2% for the first 6 months of 2009. Slide 1 shows outstanding balances from 2003 through 6/30/09. (double click on picture to enlarge slide)


FDIC call report data is only available quarterly. In order to examine month-to-month trends in commercial lending, you need to look at estimated data from the Federal Reserve’s weekly sampling of 875 commercial banks for C&I and CRE outstanding balances. The Fed’s data shows a slightly different picture. As shown in Slide 2, C&I and CRE balances have steadily declined every month in 2009, with an overall decline of 6.8% as of 9/8/09.


According to the FRB July 2009 Senior Loan Officer Opinion Survey, declining loan demand and deteriorating credit quality are behind the steady reduction in commercial and industrial lending across firms of all sizes. In response to deteriorating credit quality, banks are subjecting small, medium and large businesses to tougher lending standards and higher interest rate spreads. The banks surveyed said they expect lending standards across all loan categories would remain tighter than average until the second half of 2010. As shown in Slide 3, a bright spot in the survey is a lessening of banks tightening lending standards after a peak in November 2008 along with a slight improvement in loan demand.


The next posting will discuss similar trends in Canada and the Euro Area.