Garnet Capital Advisors Blog

Commercial lending has improved steadily over the last several years, but this recovery has certainly encountered some obstacles along the way.

Small-business lending faces challenges
A perfect example of this is small-business lending activity, which has suffered lackluster growth in many parts of the U.S., according to The Wall Street Journal. Banks held $585 billion in small business loans at the end of the first quarter, according to Federal Deposit Insurance Corp. data. While this figure was 1 percent higher than last September's figure, it was 18 percent less than the all-time high of $711 billion reached in 2008. 

Additional figures from FDIC indicate this more recent decline may be part of a broader trend, as the data shows the number of small business loans - ones with a principal of $1 million or less - plunged 19.1 percent since the start of the Great Recession, CNBC reported.

Private data paints a similar picture of lending that has fallen in the last several years, as figures provided by Skokie, Illinois-based PayNet Inc. reveal that small-business lending is below 2005 levels in almost one-third of U.S. counties, according to The Wall Street Journal.

Amid this tepid data, there were some encouraging signs for commercial lending. In July, banks with assets of at least $10 billion approved 17 percent of small business loan applications, according to figures contained in Biz2Credit.com's Small Business Lending Index and reported on by CNBC. This figure is an improvement over the same month in 2013.

Small banks' commercial and industrial loans also improved in July, rising 11 percent from the prior year, according to data provided by Moody's Analytics and reported on by The Wall Street Journal. Analysts responded positively to this news, since banks of this size frequently service small businesses.

Many bank chiefs optimistic
While analysts have picked up on these developments, they are not the only ones who are optimistic about lending, as the heads of several major banks spoke about growth prospects on conference calls earlier this year, America Banker reported.

Richard Davis, CEO of Minneapolis, Minnesota-based U.S. Bancorp, talked up his organization's ability to beat the competition, according to the news source. In the second quarter, his bank's commercial loans totaled $116 billion, a 10.4 percent increase from the year before. Davis stated that it can offer lower pricing because of its strong debt rating and sterling reputation.

However, some executives at major banks are less optimistic, including Bruce Thompson, Bank of America's chief financial officer, who predicted that loan growth will not be sharply higher than the economy's rate of expansion, the media outlet reported.

Interest-rate spreads
While the growth in commercial loans - and the total amount of this debt held - can help paint a strong picture of commercial lending, another good way to measure this activity is the spread between interest rates on these loans and the federal funds rate.

Currently, the spread for commercial and industrial lending exceeds the long-term average, according to research by Simon Kwan, economist for the Federal Reserve Bank of San Francisco. Kwan examined historical data, finding that while the difference between the two rates has been falling, it is high enough that commercial loans may not be considered cheap.

Robert Litan, nonresident senior fellow at the Brookings Institution, wrote about these spreads in The Wall Street Journal in August, stating that while the difference in rates on loans of $50,000 or less was 3.5 percent before the financial crisis, it has increased to 4 percent since.

Litan also downplayed the figures contained in the Fed's July 2014 Senior Loan Officer Opinion Survey, stating that while the total C&I loans have increased enough to surpass pre-recession levels, this is only natural, since the size of the economy has grown in size during that time.

Wary entrepreneurs
While these spreads might deter entrepreneurs from taking out loans, many are already reluctant to take on debt amid the current economic conditions, according to The Wall Street Journal. Some are still nervous after the sharp downturn the economy suffered starting in 2005.

Others are wary of using loans due to the challenges some small business owners are having keeping up with their monthly payments. Alicia Michael, owner of Carrollton, Georgia-based Carrollton Collision Center, weighed in on the situation.

"You become aware of every single penny," she told the news source. PayNet estimates that roughly 3.3 percent of the small-business loans in Carroll and adjacent counties have fallen between 31 and 180 behind, measured by dollars outstanding. "I don't have a line of credit, and I don't want one ... We run everything pay-as-you-go. I guess we're all a bit gun-shy these days."

Future uncertain
Amid these mixed signals, industry participants are divided on where commercial lending will go next, according to American Banker. These disparate views are held by more people than just the bank executives mentioned previously. Mike Mayo, a bank analyst at CLSA, commented on these developments.

"The battle lines are drawn," he told the news source. "There are some investors and banks like JPMorgan Chase (JPM) and U.S. Bancorp that think this is an inflection point for loan growth, and others [like B of A] say this is not the sign of an acceleration."

Mayo has maintained that he is undecided on whether the optimists or the pessimists will prevail, according to the media outlet. So far, there is insufficient information to determine whether lending has experienced a slight improvement or a turnaround, he maintains. While bank officials have weighed in, these experts have erred before.