March 15, 2019

How to Respond to Weaker Loan Demand


Although the economy is strong, there are also signs of weakness. Lending institutions are expecting loan growth to moderate. In an unclear environment, the best course of action is to seek profitable loan growth while managing risk.


The current economy is robust by some measures. Unemployment, for instance, is at a low not seen for a half century. The stock market is healthily on the rise again after swooning in the last two months of 2018.

Will loan growth be moderating?

But the expectations of lenders don’t fully match that data. Bankers’ loan demand expectations are not only falling, but they are also falling a great deal. Nearly 50%, for example, forecast that loan demand in the construction and land development sector will fall. Nearly 25% think demand from commercial and industrial (C&I) loans will drop from larger companies, while nearly 20% expect the same from smaller companies too.

Almost 27% think credit standards for commercial real estate (CRE) loans will tighten. Twenty-three percent expect tightening for loans secured by nonfarm, nonresidential properties. 

The future is not completely clear for loan losses.

A Mixed Picture

But as a recent American Banker article points out, observers don’t agree on what the conflicting data mean. Is it a warning sign, or simply a blip? One side believes that the lenders’ perceptions on loan demand reflect only the bad news of December and early January: a declining stock market and impasse in Washington, with thousands of government workers out of work. With stocks climbing and workers back at desks, the expectations likely have moderated.

But the other side believes that the pessimistic outlook was warranted. Growth, this side says, is moderating, so lenders are right to have less risk tolerance than in, say, 2017. Economies in both Europe and China, for example, have slowed down significantly, which affects economics around the globe, including the U.S.

Slowing Loan Growth Likely

Loan growth will likely slow in 2019, some observers believe, but banks are also increasing the credit quality of their loans to stay away from credit losses. So moderating growth is likely for the future.

Moderating loan growth is just one piece of potentially negative news. Some loan losses look likely to grow. According to the New York Fed, for example, auto loans are at default rates not seen in seven years. Not only that, but an increasing percentage of subprime car loans are held by major banks. Consumer household debt also rose in the fourth quarter of last year, to $13.54 trillion. Mortgage, auto loans, credit card debt, and student loans lead the pack.

So what’s the picture going forward? Robust growth, moderating growth, or overt loan losses?

Because of the uncertainty, banks need to plan for growth and avoiding risk at the same time.

How a Whole Loan Broker Can Help Lenders

In an uncertain environment, a seasoned loan sale adviser like Garnet Capital can help lenders maximize their profit growth and minimize risk. There are multiple strategies to pursue. First, banks can access high-quality loans from vetted nonbanks by calling their Garnet representative. Garnet can help banks access markets they may find difficult to stay in or enter in the current landscape. We can also help banks and credit unions generate fee income.

It may also be a good time to: 1) sell risky parts of your portfolio; 2) partner with a source of high-quality originations or leads; 3) enter into a referral agreement. The latter allows lenders to offer customers loans that they do not want to make with a partner that is not a bank. 

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