By Joseph Lowe, Sageworks
According to the most recent Federal Reserve Senior Loan Officer Opinion Survey, bank loan officers are easing lending standards for commercial and industrial (C&I) lending due to increased competition and a more favorable economic outlook.
As banks and credit unions look to close out 2018 strong and drive growth into 2019, a C&I lending focus could present the strategy they’re seeking.
A C&I loan is a loan that is extended to a business as opposed to an individual person. These types of loans, such as small business loans, are typically short-term and serve to aid in the financing of capital expenditures or providing working capital. According to the Federal Reserve survey, small and mid-sized businesses increased demand for C&I loans in Q2 of 2018, despite weaker demand for other lending segments such as commercial real estate (CRE) loans.
Small business lending constitutes a $700 billion market, serving over 58 million employees and 29 million small businesses. The small business lending market is a sizable one and represents some untapped opportunity for many community financial institutions who have passed on market share to focus on more profitable loan concentrations.
Focusing on a C&I lending concentration is often viewed as a strategy best suited for large financial institutions due to tighter supervision and amplified bank regulations. Forty percent of total loans from the five largest U.S. banks – Wells Fargo, Citigroup, Bank of America, JPMorgan Chase, Citigroup, U.S. Bancorp – consist of C&I loans.
However, the top 100 commercial banks by asset size only account for $1.8 billion of the $2.4 trillion C&I lending market, and C&I lending has continued to prosper for all commercial banks since Q4 of 2010, after the impact of the Great Recession began to recede.
According to the EY Q1 2018 Market Report, “[C&I lending] Delinquencies have tapered since the 2016 bump upward driven by the oil and gas sector.” Excluding the slight increase in delinquencies in 2016, C&I lending delinquencies and asset quality stress has remained close to historic lows. Furthermore, the corporate income tax was cut in December 2017 in an effort to boost demand for C&I loans, and those effects have slowly been seen across the market. For small or mid-sized financial institutions with the right projection strategy in place, investing in C&I lending can be a wise strategy for many reasons, according to Rick Dailey, senior credit risk consultant at Sageworks.
Dailey says institutions looking to concentrate their loan growth strategy on C&I lending must create projections that properly evaluate the borrowing company’s cash flow to better understand fixed expenses, variable expenses and projected expenses over a time span of 1-3 years. Banks and credit unions can choose whether to do monthly, quarterly or annual projections based on the needs of the unique financial institution or based on trends within the borrower’s industry.
“Working with projections will give you the ability to look to the future and see what’s the strength of the company to repay,” Dailey says. “Also we can look at different assumptions. What happens if [the businesses] grow 17%? What happens if [the businesses] lose a primary customer and they lose 20% in revenue. What happens if [the businesses] split the difference?”
Projections also allow credit analysts to compare the borrower’s projected cash flow and other metrics with the industry standard, which proves the customer is knowledgeable of their business and their industry, according to Dailey. “If you had a coffee shop, and the coffee shop projections you provide were showing 30% gross profit, that’s a little unrealistic considering that a coffee shop industry-wide would have a gross profit of about three percent,” Dailey says. “Does the customer have a grasp of what their industry is and what their business can perform?” Despite the many benefits, some financial institutions are not performing projections within their C&I lending strategy, according to Dailey.
“Most of the banks I’ve been working with have not been using projections [outside of SBA]. Most banks are primarily not running them because of the time that it takes to build out the projections and trying to reference what they will be using for the assumptions that they’ll make as far as accounts receivable days, accounts payable days, gross profit margin and the industry trends.”
Lenders and credit analysts remain hopeful that the uptick in C&I lending will continue to grow through the end of this year and into 2019. However, for smaller banks and credit unions to capitalize on C&I lending growth early, and ensure a strategic approach to the concentration, it’s critical to perform projections and gain a holistic view of a company’s potential cash flow.
UK might need negative rates if recovery disappoints – BoE’s Vlieghe
By David Milliken and William Schomberg
LONDON (Reuters) – The Bank of England might need to cut interest rates below zero later this year or in 2022 if a recovery in the economy disappoints, especially if there is persistent unemployment, policymaker Gertjan Vlieghe said on Friday.
Vlieghe said he thought the likeliest scenario was that the economy would recover strongly as forecast by the central bank earlier this month, meaning a further loosening of monetary policy would not be needed.
Data published on Friday suggested the economy had stabilised after a new COVID-19 lockdown hit retailers last month, while businesses and consumers are hopeful a fast vaccination campaign will spur a recovery.
Vlieghe said in a speech published by the BoE that there was a risk of lasting job market weakness hurting wages and prices.
“In such a scenario, I judge more monetary stimulus would be appropriate, and I would favour a negative Bank Rate as the tool to implement the stimulus,” he said.
“The time to implement it would be whenever the data, or the balance of risks around it, suggest that the recovery is falling short of fully eliminating economic slack, which might be later this year or into next year,” he added.
Vlieghe’s comments are similar to those of fellow policymaker Michael Saunders, who said on Thursday negative rates could be the BoE’s best tool in future.
Earlier this month the BoE gave British financial institutions six months to get ready for the possible introduction of negative interest rates, though it stressed that no decision had been taken on whether to implement them.
Investors saw the move as reducing the likelihood of the BoE following other central banks and adopting negative rates.
Some senior BoE policymakers, such as Deputy Governor Dave Ramsden, believe that adding to the central bank’s 875 billion pounds ($1.22 trillion) of government bond purchases remains the best way of boosting the economy if needed.
Vlieghe underscored the scale of the hit to Britain’s economy and said it was clear the country was not experiencing a V-shaped recovery, adding it was more like “something between a swoosh-shaped recovery and a W-shaped recovery.”
“I want to emphasise how far we still have to travel in this recovery,” he said, adding that it was “highly uncertain” how much of the pent-up savings amassed by households during the lockdowns would be spent.
By contrast, last week the BoE’s chief economist, Andy Haldane, likened the economy to a “coiled spring.”
Vlieghe also warned against raising interest rates if the economy appeared to be outperforming expectations.
“It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
Higher interest rates were unlikely to be appropriate until 2023 or 2024, he said.
($1 = 0.7146 pounds)
(Reporting by David Milliken; Editing by William Schomberg)
UK economy shows signs of stabilisation after new lockdown hit
By William Schomberg and David Milliken
LONDON (Reuters) – Britain’s economy has stabilised after a new COVID-19 lockdown last month hit retailers, and business and consumers are hopeful the vaccination campaign will spur a recovery, data showed on Friday.
The IHS Markit/CIPS flash composite Purchasing Managers’ Index, a survey of businesses, suggested the economy was barely shrinking in the first half of February as companies adjusted to the latest restrictions.
A separate survey of households showed consumers at their most confident since the pandemic began.
Britain’s economy had its biggest slump in 300 years in 2020, when it contracted by 10%, and will shrink by 4% in the first three months of 2021, the Bank of England predicts.
The central bank expects a strong subsequent recovery because of the COVID-19 vaccination programme – though policymaker Gertjan Vlieghe said in a speech on Friday that the BoE could need to cut interest rates below zero later this year if unemployment stayed high.
Prime Minister Boris Johnson is due on Monday to announce the next steps in England’s lockdown but has said any easing of restrictions will be gradual.
Official data for January underscored the impact of the latest lockdown on retailers.
Retail sales volumes slumped by 8.2% from December, a much bigger fall than the 2.5% decrease forecast in a Reuters poll of economists, and the second largest on record.
“The only good thing about the current lockdown is that it’s no way near as bad for the economy as the first one,” Paul Dales, an economist at Capital Economics, said.
The smaller fall in retail sales than last April’s 18% plunge reflected growth in online shopping.
BORROWING SURGE SLOWED IN JANUARY
There was some better news for finance minister Rishi Sunak as he prepares to announce Britain’s next annual budget on March 3.
Though public sector borrowing of 8.8 billion pounds ($12.3 billion) was the first January deficit in a decade, it was much less than the 24.5 billion pounds forecast in a Reuters poll.
That took borrowing since the start of the financial year in April to 270.6 billion pounds, reflecting a surge in spending and tax cuts ordered by Sunak.
The figure does not count losses on government-backed loans which could add 30 billion pounds to the shortfall this year, but the deficit is likely to be smaller than official forecasts, the Institute for Fiscal Studies think tank said.
Sunak is expected to extend a costly wage subsidy programme, at least for the hardest-hit sectors, but he said the time for a reckoning would come.
“It’s right that once our economy begins to recover, we should look to return the public finances to a more sustainable footing and I’ll always be honest with the British people about how we will do this,” he said.
Some economists expect higher taxes sooner rather than later.
“Big tax rises eventually will have to be announced, with 2022 likely to be the worst year, so that they will be far from voters’ minds by the time of the next general election in May 2024,” Samuel Tombs, at Pantheon Macroeconomics, said.
Public debt rose to 2.115 trillion pounds, or 97.9% of gross domestic product – a percentage not seen since the early 1960s.
The PMI survey and a separate measure of manufacturing from the Confederation of British Industry, showing factory orders suffering the smallest hit in a year, gave Sunak some cause for optimism.
IHS Markit’s chief business economist, Chris Williamson, said the improvement in business expectations suggested the economy was “poised for recovery.”
However the PMI survey showed factory output in February grew at its slowest rate in nine months. Many firms reported extra costs and disruption to supply chains from new post-Brexit barriers to trade with the European Union since Jan. 1.
Vlieghe warned against over-interpreting any early signs of growth. “It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
“We are experiencing something between a swoosh-shaped recovery and a W-shaped recovery. We are clearly not experiencing a V-shaped recovery.”
($1 = 0.7160 pounds)
(Editing by Angus MacSwan and Timothy Heritage)
Oil extends losses as Texas prepares to ramp up output
By Devika Krishna Kumar
NEW YORK (Reuters) – Oil prices fell for a second day on Friday, retreating further from recent highs as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather.
Brent crude futures were down 33 cents, or 0.5%, at $63.60 a barrel by 11:06 a.m. (1606 GMT) U.S. West Texas Intermediate (WTI) crude futures fell 60 cents, or 1%, to $59.92.
This week, both benchmarks had climbed to the highest in more than a year.
“Price pullback thus far appears corrective and is slight within the context of this month’s major upside price acceleration,” said Jim Ritterbusch, president of Ritterbusch and Associates.
Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude production and 21 billion cubic feet of natural gas, analysts estimated.
Texas refiners halted about a fifth of the nation’s oil processing amid power outages and severe cold.
Companies were expected to prepare for production restarts on Friday as electric power and water services slowly resume, sources said.
“While much of the selling relates to a gradual resumption of power in the Gulf coast region ahead of a significant temperature warmup, the magnitude of this week’s loss of supply may require further discounting given much uncertainty regarding the extent and possible duration of lost output,” Ritterbusch said.
Oil fell despite a surprise drop in U.S. crude stockpiles in the week to Feb. 12, before the big freeze. Inventories fell by 7.3 million barrels to 461.8 million barrels, their lowest since March, the Energy Information Administration reported on Thursday. [EIA/S]
The United States on Thursday said it was ready to talk to Iran about returning to a 2015 agreement that aimed to prevent Tehran from acquiring nuclear weapons. Still, analysts did not expect near-term reversal of sanctions on Iran that were imposed by the previous U.S. administration.
“This breakthrough increases the probability that we may see Iran returning to the oil market soon, although there is much to be discussed and a new deal will not be a carbon-copy of the 2015 nuclear deal,” said StoneX analyst Kevin Solomon.
(Additional reporting by Ahmad Ghaddar in London and Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; Editing by Jason Neely, David Goodman and David Gregorio)
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