US Commercial & Industrial Loan Market - Trends

Part
01
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Part
01

US Commercial & Industrial Loan Market - Trends Part One

The US economy is currently in a recovery mode after a big slowdown phase which began in 2014. The industrial production is picking up, along with the increasing stock market growth. All these optimistic changes are likely going to positively affect the current Commercial and Industrial Loan market. The only challenges that stand in its progress, however, are the increasing delinquency rate by the borrowers; strict regulating environment set up by the previous government; and the current industrial and banking policies by the present government.

The current trends in the C&I lending market, along with the regulations and its future outlook for 2020 have been presented below.

METHODOLOGY

After thorough research through sources from Federal Reserve and Chief Loan Officer Survey undertaken by Federal Reserve, no information regarding the growth rate and delinquency rate segmentation on the basis of market-type could be found. So, the focus of the research has been based on the trends of 2017, owing to the volatile stock market rates and uncertain economic scenario under the regime of the current government in the US. Because of this, the majority of trends focus on 2018, with only a single blog highlighting trends for 2020 have been included. It is to be noted that, the C&I loan market is experiencing slow growth, although, the banks have promised to ease lending norms. So, it is likely that the C&I Loan market may experience a low competitive intensity in the current scenario, and hence, it has been excluded from the scope of the research. A deep dive, into the C&I Loan market trends, is presented below.

CURRENT MARKET SITUATION

The US Commercial Banks Commercial and Industrial (C&I) Loan market currently stand at $2.134 trillion, showing an annual growth of just 1.61% in comparison to last year in which it was at $2.101 trillion. In comparison to the statistics a weak before, the market has shown a slower growth of 0.29% in which it was at $2.128 trillion. According to the calculations by Keefe, Bruyette, and Woods for the month of January 2018, C&I loans were down by an annualized 10.8%, in comparison to December, last year. According to KBW analyst, Brina Klock, the annualized decline in January 2018, "was much worse than normal, and marks the worst start to the year since January 2010." However, the Senior Loan Officer Survey conducted by Federal Reserve in January 2018, indicates optimism, as the survey results show that, the "demand for loans has changed over the past three months." For large and medium-sized firms, 84% of the bankers said, "it was about the same or somewhat stronger, while just 16% said it was moderately weaker." For small firms with annual sales of less than $50 million, 88% of bankers said loan demand was about the same or better, while only 12% said it was weaker."

RAPID GROWTH AND INCREASING DELINQUENCIES

According to Conference of State Bank Supervisors (CSBS) report, "Commercial and Industrial (C&I) lending are at an all-time high, with nearly $2.1 trillion in loans to businesses currently on the books of US commercial banks." The reason for this high lending by banks is that of the ease in their lending norms. This ease in lending by C&I, according to Bloomberg, is due to the recovery in the US business investment scenario, and increasing stock prices, both of which are "helping ease lending standards on commercial and industrial loans." The situation was worst in March 2017, in which due to lack of borrowing the US banks' loan lending growth was "falling, especially in commercial and industrial loans." But the situation started changing with the Federal Reserve's Senior Loan Officer Survey, released in October 2017, in which it was clearly mentioned that "lenders eased their standards on commercial and industrial loans with demand for such loans decreasing."

The slowdown in industrial growth has, however, led to a rapid increase in the delinquencies in C&I loans by the industries, especially the oil and gas industries. The global fall in the prices of oil and gas has led to "layoffs, lower profits, and increasing debt for oil and gas companies operating in the U.S." This downturn in industry growth, since 2014, "has been the main driver of increasing commercial and industrial loan delinquencies, and regions with significant exposure to the energy sector have been hit hard." Additionally, the retail industry and realty sector have also been hit hard by the industry downturn, and hence are also a major contributor to the rapid increase in the delinquency rate. According to the latest report by Fred Economic Data, the delinquency rate for Q4-2017 for C&I lending was at 1.17%. In order to control the rapid increase, the banks may tighten the formalities and under-wiring standards for C&I lending, especially to medium and large industries, by restructuring their existing loans, and requesting additional collateral.

According to the Federal Reserve’s latest senior loan officer opinion survey released in February 2018, "many banks anticipate that they will ease credit standards and terms for large and middle-market firms in 2018, but they expect to cool things down in the robust commercial real estate market."

MARKET REGULATIONS

The Dodd-Frank financial regulation law passed by previous US government in 2010, is seen as the major barrier that controls and regulates the financial lending by the banks. The law was passed after the slowdown of 2008 recession, and under its “Volcker Rule,” the companies are limited and controlled to make certain types of trades. Also, under the law, the banks have to undergo certain "stress tests, that are supposed to gauge how they would weather future economic strains."
Now, in the current growth scenario, the present government is planning to repeal the Dodd-Frank law, and replace it with a new law that will help to ease the norms for the banking industry regarding C&I lending.

FUTURE OUTLOOK

According to a blog post by Larry Kummer, the current C&I lending by commercial banks in the US lags behind its peak growth rate of 13.5% in January 2015. Today, it has fallen down to 1.1% in January 2018. It saw the "largest drop from January 11, 2018, to March 8." This indicates the lagging in the overall lending capacity of the banks, however, nothing can be predicted about its future in 2020, as it all depends upon the changes in the banking and industrial regulations by the present government. Also, the expected growth in the industrial sector is going to positively affect the future outlook of the C&I loan lending market in 2020.

CONCLUSION

In conclusion, the current C&I market growth 1.1% in January 2018 is very small in comparison to its peak growth of 13.5% in January 2015. The trend of slow growth, however, is likely going to change with the ease in the lending norms by the banks; easing of strict banking and trade policies introduced by previous governments; growth in the industrial sector and stock market; and the declination in rapidly growing delinquency rate, which increased as a result of losses occurred to the large and medium-size industries during the slowdown in the US economy.
Part
02
of two
Part
02

US Commercial & Industrial Loan Market - Trends Part Two

The U.S. commercial & industrial (C&I) loan market has seen an increase in competition due to competitors using technology to enhance production. This rise in competition has led to an ease of lending standards even with rising interest rates. Federal policymakers are anticipating the trend of eased lending standards to continue and have confidently continued to increase interest rates as a result. An increase in mergers & acquisitions, as well as President Trump's tax bill, are expected to increase demand for C&I lending.

With Trump's tax cut, C&I lending demand may not increase immediately or as quickly as some had hoped, but C&I lending is expected to increase eventually.

C&I Lenders, since their loans use floating rates, are bound to have increased profits with the rising interest rates.

To obtain this information, I searched for C&I loans in the United States and their most recent impacts/trends in regard to: 1) mergers & acquisitions, 2) impact of rising interest rates, 3) impact of Trump's tax bill, and 4) technology.

Technology

Industry competition has risen due to technology. This competition has had considerable impacts on the industry, which is detailed in the next section. These are some examples of recent technology trends:
1. New risk management tools
2. Technology to "enhance application timing and workflow"
3. Integrated technology -- to allow advancements in "initiation and risk assessment of commercial loan transactions."
4. Online marketing -- needs for an online presence increase as "more business owners shop online for commercial credit."
5. Automated services -- used to strengthen the lender's relationship with clients.

Competition and interest rates

Due to aggressive competition, lenders eased standards for C&I loans to large/middle-market firms. According to a survey done by the Federal Reserve in January 2018, lenders "decreased loan rate spreads, increased the maximum size of credit lines, and eased loan covenants."

Even though interest rates have been raised, loan officers are still easing lending standards for business loans. Generally, financial conditions tighten in these circumstances, but it's been the opposite. Federal policymakers are confidently "continuing to raise interest rates" due to this trend.

C&I Lenders, since their loans use floating rates, are bound to have increased profits with the rising interest rates. Comercia, a large regional C&I lender, had their shares rise 16% from Jan-Oct 2017.


Mergers & Acquisitions and trump tax bill

According to the January 2018 survey done by the Federal Reserve, an increase in mergers and acquisitions, as well as other factors such as "increases in customers' needs to finance inventory," contributed to stronger demand for C&I loans.

With Trump's tax cut, C&I lending demand may not increase immediately or as quickly as some had hoped, but C&I lending is expected to increase eventually. One reason why it might be "slow for a few quarters is that many companies 'have record levels of liquidity'" and don't need to borrow. Another reason is that some companies may choose to pay off existing debt with their tax savings instead of using their savings to borrow more money.

To capitalize on this expected demand, Pinnacle Financial Partners "plans to hire 64 C&I lenders over the next 5 years."

Conclusion

The U.S. commercial & industrial (C&I) loan market has seen an increase in competition due to competitors using technology to enhance production, and this rise in competition has led to an ease of lending standards even with rising interest rates. An increase in mergers & acquisitions, as well as President Trump's tax bill, are expected to increase demand for C&I lending. This demand may not occur soon within the next few quarters, but lenders are expecting a boost in demand for C&I lending eventually. This expectancy can be seen with Pinnacle Financial Partners' plan to hire 64 C&I lenders over the next 5 years.

Sources
Sources