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.

Tuesday, February 9, 2010

Latest Federal Reserve Board Surveys Reveal Continuing Improvement in Business Lending Conditions

For the second consecutive quarter, the Federal Reserve Board January 2010 Senior Loan Officer Opinion Survey reflects continued improvement in loan demand and loosening of loan standards, for businesses of all sizes. The largest domestic and foreign-owned banks reported easing loan terms, especially to large and middle-market businesses. These banks cited more aggressive competition as a key driver for easing loan maturities and loan spreads. (Click on image to enlarge.)
On the demand side, improvement was driven by a shift away from non-bank lending sources as well as an increase in merger & acquisition and accounts receivable financing. The Federal Reserve Survey of Terms of Business Lending, conducted once a quarter, collects loan origination data from 500 US commercial banks for a one week period. December’s survey shows a slight uptick in new loans, but volume remains substantially below historical averages.
Although the FRB surveys cited above show improving demand for new credit, C&I and CRE outstanding balances continued their month over month decline in January 2010 as borrowers pay down balances and banks ratchet down credit lines.

Sunday, January 31, 2010

The Canary in the Coal Mine: US Commercial Real Estate Values Showing Dramatic Declines


Many of the banks announcing 4th quarter 2009 earnings cite continued concerns about their commercial real estate (CRE) portfolios. One of the reasons for declining CRE credit quality is a drop in the value of the underlying real property. This mirrors the challenge being faced by homeowners; as home values decline, borrowers end up owing more money on the property than it is worth.

The Moody’s/REAL commercial property index (CPPI) tracks the value of commercial real property over time. The index is unique in that it tracks same-property round-trip price changes based purely on the documented prices in completed, contemporary property transactions. The index was established in January 2001 with a base value of 1.00. National commercial real property values are currently down 42% from their 3rd quarter of 2007 peak. (Click on image to enlarge).
While the index dropped more than 10% in the 3rd quarter for apartment and office buildings, retail buildings rose 2.5%. While one data point does not represent a trend, the national index (published monthly) showed a 1% increase in November, the first monthly increase since September 2008. The original data can be found at: MIT Center for Real Estate.

Stay tuned. The trend in commercial real property values is an important indicator of how commercial real estate lending portfolios will fare in 2010.

Monday, January 25, 2010

Update: Business Lending Performance by the Top 22 TARP Recipients

Banks continue to be criticized for a lack of lending to US businesses, especially small businesses. As these banks digest sweeping proposals from President Obama affecting their industry, let’s take a look at the latest data on lending activities by financial institutions who received capital infusions under the government’s TARP program.

Since I last looked at this data, the overall level of loans outstanding by business borrowers continued to decline. Since program reporting began in February 2009, the average loan balance outstanding has decreased 10.2%. The latest data indicates that balances are stabilizing, but we need a few more months of data to see if this trend continues. (Click on image to enlarge)

Since program inception, commercial and industrial (C&I) loans outstanding declined 14.2% while commercial real estate (CRE) loans held steady. Looking at new originations, new loan originations have risen steadily since August, driven by a 53% increase in new C&I loans. Unfortunately for small businesses, these new loans were made to larger firms.

Looking at small business data separately, loans outstanding fell 4.5% since April, while new originations are trending downward.

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

Friday, January 15, 2010

SBA Recovery Act Loan Programs Continue to Gather Steam

As previously discussed in this blog, 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. In November 2009, the SBA began running out of funds for the program, and began preparations to dismantle the Recovery Act programs. Luckily, on December 19, 2009 President Obama provided an additional $4.5 billion in funding for the 7(a) and 504 loan programs which provides payment of certain loan fees and higher SBA 7(a) guarantees.

Due to uncertainty regarding continued funding for the SBA Recovery Act programs, banks and small businesses rushed to complete loan applications in November. As shown in Exhibit 1, this increased volume resulted in a 56% increase in loan originations from October to November. However, growth in SBA loan originations has not been steady; October originations fell almost 27% from September. (Click to enlarge image)


The SBA estimates that funding will be available for Recovery Act loan activity through the end of February, 2010. When funds are close to being exhausted, the SBA will again begin to transition back to standard SBA lending programs. Hopefully, banks and borrowers will find a middle ground on credit quality standards and SBA origination volumes will continue to climb.

Sunday, January 10, 2010

Latest FRB Senior Loan Officer Opinion Survey Shows Continuing Improvement in Business Lending Conditions

The Federal Reserve Board October 2009 Senior Loan Officer Opinion Survey reflects continued improvement in loan demand and loosening of loan standards, for businesses of all sizes. The loan standards category includes pricing, maximum maturity, amount of credit lines, and loan covenants. Banks continue to have little tolerance for risk and are closely monitoring economic conditions in their geographic regions. Loan demand by businesses remains slow as a result of depressed sales and high unemployment. (Double click on image to enlarge.)

Although demand is beginning to improve, C&I and CRE outstanding balances fell month over month throughout 2009. Data from the Federal Reserve’s weekly sampling of 875 commercial banks for C&I and CRE outstanding balances shows an overall decline of 10.7% for 2009. During 2009, CRE loans declined 6%, while C&I loans declined almost 16%.

With the unemployment rate stuck in double-digits, I believe it will be several more months before business borrowing picks up substantially. For the economy’s sake, I hope I’m wrong.