Banks Say Commercial Lending Slowing, 'Aggressive' Competition Leads to Easing of Terms, Fed Reports
WASHINGTON -- Some banks are starting to see a weaker demand for commercial and industrial loans and as a result are easing terms to pick up the pace.
The Federal Reserve Board's October 2006 Senior Loan Officer Opinion Survey on Bank Lending Practices culled findings from 54 domestic banks, which accounted for between 12% and 56% of all C&I loans on the books of domestic commercial banks as of June 30, 2006. Foreign respondents in the survey accounted between 10% and 48% of all C&I loans on the books of U.S. branches and agencies of foreign banks.
All domestic and foreign respondents that reported having eased their lending standards or terms in the October survey pointed to more aggressive competition from other banks or nonbank lenders as the most important reason for having done so. Notable net fractions of domestic institutions also cited increased liquidity in the secondary market for these loans, a more favorable or less uncertain economic outlook, and a reduction in defaults by borrowers in public debt markets as reasons for having eased credit standards or terms on C&I loans.
At domestic banks, demand for C&I loans from large and middle-market firms was reportedly little changed, on balance, in the October survey. About 15% of these institutions, on net, indicated that they had experienced weaker demand for such loans from small firms over the previous three months. At U.S. branches and agencies of foreign banks, nearly one-fifth of respondents, on balance, reported that they had seen weaker demand for C&I loans over the same period. All of the domestic institutions that experienced weaker demand for C&I loans attributed the softening, in part, to borrowers' decreased needs to finance investment in plants or equipment.
Looking toward future business, about 10% of domestic institutions, on net, and nearly 20% of foreign respondents reported that the number of inquiries from potential business borrowers had decreased moderately over the previous three months.
Nearly 40% of domestic institutions, a notably larger net fraction than in the July survey, indicated that they had tightened lending standards on commercial real estate loans over the previous three months. More than one-fourth of domestic respondents also reported that they had experienced weaker demand for such loans over the same period. By contrast, both lending standards and demand for commercial real estate loans at foreign institutions were little changed in the October survey. While credit standards on C&I loans to middle and large businesses were unchanged in October, domestic bank officers indicated that they had eased terms over the past three months. Almost one-third of respondents--a somewhat smaller net fraction than in the July survey--noted that they had trimmed spreads of loan rates over their cost of funds over the past three months, while nearly one-fifth of banks--about the same net percentage as in the previous survey--reported that they had reduced the costs of credit lines. About 15% of domestic respondents, on net, indicated that they had eased loan covenants.
Considerable fractions of respondents also cited borrowers' decreased financing needs for inventories and accounts receivable, as well as increases in customers' internally generated funds, as reasons for weaker loan demand. Among domestic banks that saw stronger demand for C&I loans, three-fourths pointed to a rise in merger and acquisition activity as a reason for stronger loan demand, while two-thirds cited borrowers' increased needs to finance inventories.
Bank officers were also asked whether C&I lending has resulted in a surge of loans to fund mergers and acquisitions. About one-half of domestic institutions indicated that M&A-related C&I loans accounted for less than 5% of the loans currently on their books, and roughly one-third of banks noted that such loans accounted for between 5% and 10% of their loans. The remainder of banks, except for one institution, reported a share that was between 11% and 30%. On average, those banks with larger C&I loan portfolios had higher M&A loan concentrations, the Fed reported.
Domestic respondents generally reported that the share of M&A-related C&I loans on their books that were bridge loans was quite small: 90% of domestic institutions reported that this share was less than or equal to 10%. In the survey, bridge loans were defined as those loans that banks expected to be paid down with funds raised in capital markets within the next 12 months. Shares were higher at U.S. branches and agencies of foreign banks, where about two-thirds of respondents indicated that the share of such loans was 10% or less, while nearly one-third of respondents noted that this share was between 11% and 50%. --firstname.lastname@example.org