Garnet Capital Advisors Blog

There is a shift in the midst between a focus on commercial loans to consumer lending among US banks.

With a brand new year comes a new set of challenges and trends for the banking industry. But such factors shouldn't be seen as obstacles for banks, but rather as opportunities to channel new ways of gaining profits.

In particular, it's the average US consumer that banks need to start paying more attention to. For a while, banks were predominantly focusing on commercial loans, thanks to the strength that US businesses have shown since the financial crisis of 2008.

During these past few years, banks had more of a chance to build profits through commercial lending as consumers retreated from taking out loans and instead shifted their focus on paying down their debt.

After the crash in 2008, consumers who were heavily leveraged were dinged as their exorbitant loan-to-value ratios finally caught up with them. Many Americans wound up with zero - or even negative - equity in their homes, and wound up in foreclosure.

Embracing Consumer Lending

Rather than risk lending to consumers who had a high chance of defaulting on their loan payments, banks instead channelled their energy and capital to commercial businesses in the years following the economic debacle. But it seems as though the tide is changing in this department.

Lately, commercial profits have suffered.

At the same time, inflation and interest rates are low, the labor market has improved, and consumer purchasing power has strengthened. All these factors combined point to heightened consumer confidence, which lends itself to more borrowing power.

With these factors taken into consideration, perhaps now is as good a time as ever for banks to shift their focus onto consumer lending to take advantage of untapped profit sources. But banks need to seriously ask themselves whether or not they are accurately and effectively positioned to take on what is poised to be a strong year for consumer loan growth.

Instead of commercial lending, it's consumer lending that will truly push loan originations and strengthen banks' balance sheets.

Consumer lending tends to be much smaller in scale compared to commercial lending. But along with smaller dollar amounts associated with consumer loans comes much more diversification in loan portfolios by adding to assets already on the balance sheet. Having a variety of assets lowers banks' risks should any one particular asset drop significantly in value.


Consumer purchasing power is helping to boost lending from banks and credit unions.

Consumer loans are also associated with shorter terms and/or adjustable rates, which are ideal in a rising interest rate environment. And with the Fed recently announcing an increase in rates, having a loan portfolio with predominantly short-term loans puts banks in a better position to have these loans liquidate rather than be a long term balance sheet drag and not provide the monetary gains that financial institutions are seeking.

The Numbers Are Positive in the Consumer Lending Department

According to TransUnion, consumer credit markets will complete their recovery following the financial crisis of 2008 after a strong performance in 2015. The national mortgage delinquency rate declined by almost 30 percent over the past year, and the credit card delinquency rate is now 2.76 percent - almost half of what it was in the third quarter of 2009. Auto delinquency rates stood at 1.16 percent by Q3 2015.

The firm also estimates that the national delinquency rate on mortgages and credit cards will decrease to 2.06 and 1.46 percent by the end of 2016, respectively. In addition, auto delinquencies are forecasted to drop to 1.11 percent by year-end.

Partnering Up With Experts in Loan Originations

With consumer credit quality trends improving in all asset classes, banks can expect lowered risk when lending to the non-business demographic.

Traditional US banks are increasingly being faced with issues such as high operating expenses, continued tight regulations, squeezed margins, more competition, and the need to contend with innovative technological trends that consumers have now come to expect.

As such, having a well-planned and thought-out strategic plan is as important as ever. Banks need to embrace the inevitable trends and cultural changes within the financial industry into 2016 and beyond. Adding the right loans to a portfolio and shedding unprofitable ones is key, as is working with solid loan origination partners. That's where teaming up with experienced professionals is especially helpful.

At Garnet Capital, we've scoured the lending landscape to find the best origination entities that are ideally suited to work with banks and credit unions. We help financial institutions address the consumer loan balance sheet on both the buy and sell sides in order to ensure loan portfolios are as profitable as possible.

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