With competition increasing from the likes of hedge funds and private equity firms that are making business loans, banks are being forced to rethink how they approach that part of the business, reported the Wall Street Journal.
According to the Wall Street Journal, based on data from the Federal Reserve, business lending is picking up — the number of loans was up 3.3 percent as of May 9 on a year-over-year basis. Earlier in the year, the growth rate was below 1 percent — and while it’s still way lower than in years past, it is starting to pick back up.
Banks have long blamed several factors for the decline in business lending, but a new culprit is being cited: nonbanks that come in and steal commercial clients by offering looser repayment terms and giving borrowers longer periods of time to pay back the loans. “That competition has been aggressive,” Greg Carmichael, CEO of Fifth Third Bancorp, told the Wall Street Journal in an interview. “Private equity, REITs, insurance companies — it’s definitely a formidable competitor.” He said to adapt to the newfound competition, the bank is focused on keeping its relationships with commercial clients that aren’t based only on loans intact. “What a REIT can’t do is provide the technology we have in treasury management or corporate banking,” he said in the interview.
Flush with cash and less regulated than traditional banks, hedge fund and private equity firms are able to compete with the banks. Meanwhile, insurance companies and pension funds are going after commercial mortgages as they seek long-term returns that are more steady, noted the report. The paper noted that the nonbanks are going after the companies that have a lot of debt and would normally not get a loan for a traditional bank.
In addition to competition from nonbanks, banks cited uncertainty around President Donald Trump’s policies for the decline in business loans. With uncertainty about Trump’s tariff policies, agriculture and manufacturing companies that usually need capital are sitting on the sidelines. Bill Demchak, Chief Executive of PNC Financial Services, said he thinks FinTechs online will also impact lending. “FinTech has decided to make things very simple for small business and to do it with a very low-cost base: They don’t have an army of bankers running all over the place,” Demchak told the paper in an interview. “In the near term, that has given them a competitive advantage. In the long term, you’ll see us and other banks either partnering with them or replicating what they’re doing.”