2018 was a year of massive growth among financial institutions. While national banks like Goldman Sachs Group Inc. (NYSE: GS) and Wells Fargo & Co. (NYSE: WFC) saw their shares reach new all-time highs, the growth was even more pronounced among regional banks. Shares of ACNB Corporation (NASDAQ: ACNB), Comerica Incorporated (NYSE: CMA), East West Bancorp, Inc. (NASDAQ: EWBC), First Financial Bancorp (NASDAQ: FFBC) and many others also reached new peaks over the course of the last year.
There were plenty of reasons behind this growth: equities were strong across the board throughout most of 2018, economic optimism was high, and rising interest rates meant banks had wider operating margins to pass on to clients.
However, one of the main talking points in the quarterly earnings calls of both national and community banks was the expansion of their commercial and industrial loan portfolios. Nationally, commercial banks grew their C&I lending portfolio by 5 percent over 2018, nearly double the growth they saw in 2017. What’s more, 2018 marked the eighth consecutive year of lending growth, a feat that hasn’t happened since 1990.
This growth was sparked by high demand and an increase in competition, both within the banking world and from without. The emergence of financial technology companies like small business lender Credibly has increasingly become a primary source of short-term financing that has historically been serviced by C&I loans.
“We’ve seen a large increase in customer demand over the last few years, as well as an increase in the number of customers who come to us as their primary option for business financing,” said Ryan Rosett, Co-Founder and Co-CEO of Credibly. “Between our experiences with customers and the rapid industry growth, it has become clear that alternative lending solutions are becoming the go-to debt financing source for SMBs.”
While 2019’s lending environment remains mostly unchanged, with banks indicating that C&I loans will continue to be a major revenue driver for the year, businesses will likely find it more difficult to obtain attractive terms on loans going forward. That’s because the first quarter of 2019 marked the first time since 2016 that a net percentage of banks have raised their requirements for C&I loans to small firms.
Although the increase is modest, the decision indicates that banks are growing wary of increasing their C&I loan portfolios for the new fiscal year. However, this trend is not exclusive to C&I lending as a large contingent of banks have also been raising standards for commercial real estate loans, and all of this is happening in an environment where demand for institutional loans is actually showing an overall decline.
So why are banks making it harder to apply for a loan? Well, after seeing the market surge through most of the year, banks received a bit of a rude awakening in the final months of 2018 as their equity fell to year-lows. Shell-shocked, financial institutions began shying away from issuing corporate debt as a means of financing their own operations. With less capital projected to come in from their own lines of credit, banks made the decision to make it harder for those further down the food chain to find financing.
Meanwhile, fintechs continue to outpace traditional banks in personal loan originations, and many SMBs are now bypassing applying for traditional loans entirely in favor of fintech lenders. This is largely thanks to strong client growth, aided by technology-focused underwriting strategies and strengthening loan portfolios.
The expanded scope and quality of lending among fintechs is something developing throughout the industry. Just this year, Credibly announced a $10 million offering of investment grade senior debt. Previously, the company had used securitization of its debt portfolio to expand the range of potential clients to which it could lend.
Whether lending standards loosen again or remain stringent, the near-term outlook is certain: Until banks are sure they can maintain their bottom line and ensure their equity goes in the right direction, borrowers will have to either clear their hurdles or take their business elsewhere.
Credibly is a content partner of Benzinga
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