BANKS GET TOUGHER ON BUSINESS LOANS
Stricter lending practices noted in new survey largely a response to oil downturn
Lenders are tightening the credit spigots for businesses.
The Federal Reserve’s senior loan officer survey, due to be released Monday, is likely to show that in the April-June period banks toughened their corporate and industrial loan standards for a fourth consecutive quarter.
In the first quarter, 13% of banks tightened credit conditions for loans to midsize and large businesses, while just 1.4% loosened them.
The trend, following a period of easing since 2010, is largely a byproduct of the oil industry downturn, analysts say. Banks expect delinquencies and charge-offs in the oil and gas sectors “to deteriorate over 2016 and noted that they were undertaking several actions to mitigate the risk of loan losses,” according to the Fed’s first-quarter loan officer survey.
Mark Zandi, chief economist of Moody’s Analytics, downplayed the concerns, saying the stricter lending standards are being applied to energy-related loans and leveraged corporate buyouts.
Others, however, say the heightened vigilance is affecting other sectors. When oil and gas companies don’t pay their bills, their suppliers typically get squeezed as well, UBS research analyst Brennan Hawken says. And lenders burned by loan defaults often grow more conservative, UBS credit strategist Stephen Caprio says.
For now, lenders’ prudence appears to be mostly affecting riskier borrowers. In the large corporate market, the issuance of high-quality, low-risk bonds is up 3.3% for non-energy companies and down 38% for energy-related firms, UBS data show. For high-yielding “junk” bonds, which finance riskier entities, issuance is down 35% for all borrowers.
Banks are being pinched by narrow net interest margins due to the Fed’s low interest rates and its recent forecast that rates will rise more gradually than anticipated. Large banks also must hold more capital against loans under reforms prompted by the financial crisis. As a result of both developments, many banks are dialing back loans to borderline borrowers, says Rohit Arora, CEO of Biz2Credit, which connects firms with lenders.
Some small businesses, in turn, are getting a chillier reception when applying for loans. In the first six months of this year, an average 4.2% of small businesses said their borrowing needs weren’t satisfied, up from 3.1% during the last six months of 2015, according to the National Federation of Independent Business’ monthly survey.
“Customers (with average credit) that would have been approved … a year ago are having a much tougher time” with both banks and some online lenders, says Ami Kassar, CEO of Multi-Funding a loan adviser for small businesses. Commercial real estate loans, he says, are even more elusive because of bank capital requirements enacted early last year.