Banks ease credit standards as demand for business loans grows

Bank lending to businesses is on the rise as competition intensifies to replace government-backed debt that lenders racked up during the height of the COVID-19 pandemic.

During the fourth quarter, a net 21.7% of bank loan officers reported increased demand for commercial and industrial loans, compared to a net 7.6% who reported the same three months prior, according to a recent Reserve survey. federal.

The results represent a rebound from the pandemic low point at the end of 2020, when a net 35.3% of loan officers reported that demand was down.

The same recent Fed survey found that a net 14.5% of loan officers said they were easing standards on commercial and industrial lending, a sharp turnaround from the third quarter of 2020, when a net 71, 2% of loan officers said they were tightening standards.

“There’s probably a little less sense of keeping the reins pulled,” Piper Sandler analyst Scott Seifers said in an interview.

Seifers predicted that demand for business loans will continue to improve in 2022.

The rebound in demand and weakening credit standards come as the number of Paycheck Protection Program loans on banks’ balance sheets declines. In some cases, banks may relax their underwriting standards to compensate for the disappearance of PPP loans.

PPP loans have been reduced to just 1% of total loans as banks scramble to write off remaining government-backed debt, Piper Sandler researchers said in a note to clients this week. In March 2021, PPP loans represented 5.2% of total loans.

“It’s really about banks reversing tough pandemic-era underwriting standards, rather than easing standards beyond historical ones,” said Gita Thollesson, senior strategic business adviser. in the second quarter, in an e-mail. “Going forward, banks are likely to take a more nuanced, industry-based approach to credit.”

During fourth-quarter earnings calls, bank CEOs repeatedly offered more optimistic — though still somewhat cautious — forecasts for overall loan growth this year, thanks in large part to a rebound in loan demand. business loans.

Bill Rogers, CEO of Financial truist in Charlotte, North Carolina, said in a Jan. 18 call that corporate clients were borrowing again. Companies want to be ready to stockpile once supply chain issues are resolved and the recent rise in infections with the omicron variant recedes, he said.

“People just make the decisions to move on,” Rogers said.

Other banks that rely heavily on business lending announced a more optimistic outlook for 2022 on the heels of a busier fourth quarter. William Demchak, CEO of the PNC Financial Services Group, with assets of $560 billion, told a conference on January 18 to call that commercial and industrial lending “has accelerated in recent months” in just about every type of industry.

At Bank of America, commercial lending was up 9% quarter over quarter, excluding PPP debt liquidation.

BofA chief executive Brian Moynihan said in a January 19 call that much of the growth was due to commercial lending through the company’s wealth management business, with wealthy customers seeking to borrow for bet on certain assets. This growing part of commercial lending activity depends on the relationships that develop from the investments banks make in their talent, he said.

“This reflects the intense relationship management effort our teams have put in over the past two years, and the addition of more and more relationship managers,” Moynihan said.

The modest increase in demand for business loans at the end of the year is “reason for cautious optimism,” Thollesson said in a report to clients.

She warned that commercial deposits with banks were up 15% in the second half of 2021 compared to the start of the year. Until businesses spend that stock, the outlook for business loan growth will remain cautious, she said.

But she also pointed out that rising inflation is often accompanied by increased commercial and industrial borrowing, as companies try to lock in their loans before the Fed raises rates.

Even with the Fed set to raise interest rates next month, the outlook for commercial lending is positive as banks bring underwriting standards back to normal, Thollesson said.

Rosemary C. Kearney