Are U.S. Banks Loosening Standards to Boost Commercial Lending?

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Are U.S. Banks Loosening Standards to Boost Commercial Lending?

by: Research Recap June 15, 2011

Standard & Poors noted yesterday that commercial lending continues to lag demand, but Fitch Ratings expresses concern that US banks may be loosening lending conditions to boost growth in loans. At the same time low loan activity risks reversing the growth in the economy. Total loans on U.S. bank balance sheets have declined in each of the last 11 quarters after peaking at just under $8 trillion in mid-2008, according to Fitch Ratings. Loan balances are down 12% from the peak and now approximate levels seen at year-end 2006. The absence of new loan activity has raised concern that the recent, albeit tepid, growth in the domestic economy may reverse. Furthermore, Fitch believes the lack of loan growth has cast a shadow on both the banking industrys willingness and ability to extend new credit. In a special report, Fitch examines the trends in loan growth to assess the implications for bank performance and Fitchs bank ratings. The primary concern from Fitchs perspective is not the lack of loan growth, but the growth and accompanying competitive pressures being reported in commercial loan portfolios. The overall lack of loan growth at this point in the economic cycle is not unprecedented. Fitch believes it is reasonable that weak overall loan growth may continue for the remainder of 2011. Fitch does not believe weak loan growth in isolation will cause the economy to reverse course in the immediate term. In contrast to the trends in overall loan growth, Fitch highlights that commercial loans have increased in each of the last three quarters. The emergence of growth is notable and potentially concerning given the still uneven conditions in the overall economy. Fitch is more concerned that the banks are reporting an immediate need to loosen terms, conditions and pricing to obtain growth. While the trends in credit terms and pricing may represent a movement toward normalcy from previous very tight conditions, the immediate emergence of these trends does raise concern for the risk/return dynamics of commercial loans in future quarters. Banks possess both the ability and willingness to lend as evidenced by trends in commercial loans. The execution of disciplined loan growth will be a key factor in future rating decisions. The immediate impact on earnings will be easy to detect and quantify. The assessment of the new loans representing the proper risk/return dynamic will be more challenging and a more significant factor in determining if rating changes are warranted.

http://seekingalpha.com/article/275059-are-u-s-banks-loosening-standards-to-boost-comm...

9/23/2011