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The Crossroads Of US Commercial Lending

Financial analysts constantly keep tabs on the state of business lending in the U.S. But when the Federal Reserve announced last week that it would not be raising interest rates, instead voting to maintain them at record lows since the 2008 financial recession, the latest data for business lending in the nation became especially insightful.

While the Fed said it felt the U.S. economic health is improving, a unanimous vote has kept interest rates at near zero, where they have stood for nearly a decade.

The decision has implications across the economy. But corporate borrowing especially could be at a fork in the road. Analysts are now taking a look at the business finance landscape in the context of the Fed’s vote, assessing how the health of corporate lending has changed since 2008 and looking ahead to mull the possible future impact of an inevitable federal interest rate increase on business borrowers.

Q1 2015

The Commercial Finance Association released its Quarterly Asset-Based Lending Index for the year’s first quarter. According to CFA analysts, U.S. businesses used 42.2 percent of their credit lines in Q1, up from 41.6 percent the quarter prior. Overall, credit lines increased for companies by 1.7 percent from Q4 2014 and were 7.7 percent greater than in the same quarter the year prior.

The CFA additionally found data to suggest a strong commercial lending environment. “CFA’s ABL Quarterly Index Report provides more evidence that our economy has turned the corner, and U.S. businesses were ready to grow in the first quarter,” said CFA Chief Executive Officer Robert Trojan. “Growth in credit line commitments and utilization illustrate that companies are expanding, albeit cautiously and that asset-based lenders are a critical source of financing for that growth.”

Putting It In Perspective

The CFA’s most recent numbers were released in the same week that analysts at Trefis examined the health of commercial bank lending in the U.S. at various points since the 2008 recession. Experts aggregated data from the Fed and compiled information regarding the percentage of commercial loans outstanding among U.S. banks in October 2008, when loan sizes were at their highest level just before the financial recession, in February 2010, when loan sizes were at their lowest level since the recession, and in April 2015, for which analysts had the most recent figures available.

In the context of the Fed’s recent decision, Trefis found significant growth among the percentage of business lending compared to other financial products among the nation’s banks. Banks especially increased their business lending since February 2010, analysts said, with an annual growth rate of nearly 9 percent since that period.

Residential mortgage loans surpassed commercial real estate and industrial loans in all three periods, but as of April 2015, commercial and industrial loans made up 22.7 percent of all banks’ lending portfolios — higher than both October 2008 and February 2010. Commercial real estate loans saw their peak within banks in February 2010, when they made up 24.8 percent of all lending.

In addition to examining U.S. commercial lending behavior based on data from the Fed, Trefis also took a look at the nation’s largest banks — Bank of America, Wells Fargo, U.S. Bancorp, JPMorgan Chase and Citigroup — to explore each institution’s business lending habits since the financial recession.

Experts highlighted Bank of America as seeing the most commercial loan growth in the last three years, a feat Trefis described as “considerable,” especially considering Bank of America already had the largest commercial loan portfolio at the beginning of that period. According to the most recent data, Bank of America holds about 14 percent of the national commercial loan industry, worth about $1.85 trillion.

While Wells Fargo saw stronger growth in commercial lending in recent years than JPMorgan — the two are competing for second place — analysts predicted that JPMorgan will actually surpass Wells Fargo by the end of 2015. The two have nearly $290 billion outstanding commercial loans in their portfolios, reports said. Citigroup came in fourth place, though Trefis noted that the institution concentrates most of its commercial lending outside the U.S. Still, the bank saw nearly $100 billion by the end of 2015’s first quarter in commercial loans — less than half of its entire global portfolio. U.S. Bancorp came in at fifth place.

Collectively, analysts estimated the five banks to hold about $900 billion in outstanding commercial loans — about half in the nation.

Hanging On The Fed’s Word

Both findings from the CFA and Trefis are especially relevant following the Fed’s announcement. The sentiment of an improving U.S. economy reached by analysts was similarly shared by the Fed despite its decision not to raise federal interest rates, according to reports.

Keeping those interest levels at near-zero has surely excited all borrowers, including business owners. But as the Fed had earlier suggested that it would raise the interest cap this month, only to reveal this month that it would hold off on doing so, means the economy is on-edge waiting for an inevitable increase. That interest rate hike will have a significant impact on business lending.

“When the Fed raises short-term interest rates, they’re raising the cost of money, and that impacts the cost of money to consumers, businesses and governments alike,” said Bankrate’s Chief Financial Analyst Greg McBride in a recent interview with the Los Angeles Times.

But by not increasing the interest rates this month, some experts say the market climate will be placing more pressure on corporate borrowers. Analysis from Bloomberg labeled the Fed’s decision a loss for corporate borrowers.

While low interest rates have encouraged companies to pay dividends and improve their standing with investors, Portales Partners LLC analyst Charles Peabody told Bloomberg, “There are a lot of pressures on management to lever up to improve returns. It will be a problem if interest rates go up.”

The Fed is now expected to raise rates in the near future; though because many analysts expected rates to have already risen by now, experts and borrowers alike will be closely watching the Federal Reserve’s next moves.


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