June 15, 2015

Banks Making More Commercial Loans to Businesses

As the economy improves in the United States and around the world, increased business confidence has created plans for growth and willingness to borrow, and banks are making more commercial loans to meet this need. With commercial loans up 8.5% in the first quarter of 2015 and residential loans up only 1.7% that same time period, commercial loans may overtake residential mortgages for the first time in 30 years.

Growth in Commercial Loans Across Banking Industry

Both larger commercial banks and smaller community banks are increasing commercial lending and devoting more resources to building and supporting that business. Although GE is shedding its commercial lending operations to reduce its bank's overall size and decrease regulatory oversight, Bank of America, which has the biggest commercial loan portfolio, increased staffing in its commercial lending group by 4%. This increase comes while the bank was decreasing its overall staffing. Another sign of the emphasis on commercial loans is that on the consumer lending side of their business, Bank of America isn't replacing maturing loans. Bank of America and other banks have also reduced the size of their mortgage portfolios. Meanwhile, community banks raised the amount of loans held, by 10%, to $190 billion. Smaller banks are buying smaller portfolios such as the ones found on the Garnet website (www.garnetcapital.com).

Growth in Commercial Loans Reflects Business Activity

The increase in commercial loan activity reflects improved business activity and economic growth, while the demand for consumer loans and mortgages remains depressed as consumers continue to regroup from the economic challenges of the past few years. Businesses kept their books in better shape than consumers during the recession and are better positioned than consumers for borrowing. The decrease in unemployment is another sign of increasing confidence, allowing for business expansion. However, businesses are taking loans out now not only because of plans for growth but also because of their concerns that interest rates will rise soon, making it more expensive to borrow if they wait.

Regulatory Oversight to Ensure Quality Loans

Banks were forced to tighten standards for consumer lending and increased regulations have increased the cost of making consumer loans following the economic crisis. Regulators are keeping an eye on banks' portfolios to make sure the banks aren't lowering lending standards in order to initiate more commercial loans. Default rates have dropped, but that could change if the economic situation worsens. Because interest rates are expected to rise slowly, banks believe the risks are manageable. For now, banks see these loans as contributing to their increased profitability.

Is It Time to Grow Your Loan Portfolio?

If you want to increase the size of your loan portfolio, register for Garnet's online portfolio auction system. Contact us to learn more about our auctions and other services Garnet Capital Advisors offers to help manage your loan portfolios.