For a commercial lender, William Puckett, head of business banking at National City Bank of Minneapolis, had a pretty good year. The size of his loan portfolio is up about 6% from last year.
With the economy now well into its third year of recovery, that type of growth should be par for the course.
But on a nationwide basis, the amount of outstanding business loans held by commercial banks continued to erode this year, even as consumer lending picked up. And the outlook for business lending in 1994 is less than robust.
|Modest Growth' Predicted
"I think we will probably see at best very modest growth in C&I lending," said Sung Won Sohn, chief economist at Norwest Corp.
Indeed, many bankers, analysts, and economists think the slump in commercial lending is a structural change, not just a cyclical downturn.
Businesses in general are either still paring their debt or managing it more carefully. And those that do borrow are gravitating increasingly to the public markets. Even medium-size companies that once had little, if any, access to the public markets are now gaining entry.
And with no real sign of a pickup in inflation, the need to finance a buildup of inventories to hedge against rising prices is largely absent.
Wachovia Content with 3.5%
Against this backdrop, Wachovia Corp. is "reasonably happy" with the 3.5% increase this year in its business loan portfolio, said Donald Carson, chief administrative officer of Wachovia Corporate Services Inc., the corporate banking arm of the Winston-Salem, N.C.-based banking company.
"I think our managers are more optimistic about loan growth next year," said Mr. Carson. But he anticipate only a "modestly better" performance.
In Georgia, though, where Wachovia is trying to establish itself as a top-tier lender, the bank has achieved double-digit growth in its commercial loan portfolio, Mr. Carson said.
|Slight Sense of Optimism'
In New Jersey, Norman McClave, executive vice president for credit administration at First Fidelity Bancorp., said he detects a "slight sense of optimism" that business will pick up next year. But a lot of firms in his region are still hurting, he added.
Michael Murray, vice chairman for corporate banking at Continental Bank Corp. in Chicago said his bank's business loan portfolio is probably off by 2% to 3% this year, though most of the runoff was in the first half of the year.
Continental's flow of financing requests picked up smartly in the fourth quarter, and Mr. Murray said he anticipates 5% to 7% growth in the bank's business loan portfolio in 1994.
Mr. Murray also reported a pickup in demand for the type of financings that don't show up in the loan portfolio, such as asset securitizations and private placements.
Expanding Product Lines
Given the deteriorating demand for traditional loans, banks in general are trying to broaden their product lines.
"Obviously, we're trying to make as many loans as we can," said Mr. Carson at Wachovia. But one of the bank's key strategies, he added, is to take a "credit solutions" approach with customers that doesn't focus exclusively on loans
"If they do a bank credit, great, it's on our books. But if we can do something else for them, that's fine too," Mr. Carson said.
In Minneapoliss, National City has lost some of its larger customers to the public markets, but most still rely primarily on traditional bank loans. Competition for their business is intense.
In a market that includes superregional Norwest Corp., National City, with assets of about $500 million, tries to offer its customers big-bank sophistication, along with the attention they might find from a community bank, Mr. Puckett said.
The strategy seems to be working -- half of National City's loan growth is coming from new customers that have been lured from other banks. But the growth comes at a cost.
"We try not to compete on price, but the price it takes to get a deal today is lower than it was a year ago," Mr. Puckett said.
Moreover, National City routinely reviews the terms of existing loans for its higher-quality customers, with an eye toward lowering the pricing if that's what it takes to keep the business.
Getting a Jump on Rivals
"If we don't volunteer something, it creates a competitive entry [for other banks] that we would rather not have," Mr. Puckett said.
National City focuses on small to midsize companies with annual sales of $25 million to $50 million. In the past, the bank has priced its loans off the prime rate.
But like a growing number of banks, National City is now offering these customers the option of pricing their loans off the London interbank offered rate -- an option traditionally reserved only for large corporations.
The switch to Libor-based pricing usually means a more favorable rate for the borrower.
Right now, the spread between the three-month Libor rate and the prevailing 6% prime rate is unusually wide -- about 2.6 percentage points.
A banks shift their customers from prime- to Libor-based pricing, not all of that spread is getting captured, bankers acknowledged.
The pressure on pricing this year has been felt in all areas of the loan market.
Christopher Snyder, president of Loan Pricing Corp., warned that banks may be slow to readjust pricing upwards if loan demand eventually recovers.
Indeed, Mr. Snyder disagrees with the view that the slump in business lending is permanent.
For one thing, borrowers who flocked to the public debt markets this year to lock in attractive fixed-rate financing, may come back to the loan market.
If the economy heats up enough to spark higher inflation and interest rates, that will take the bloom off the bond market, he said.
Mr. Snyder isn't predicting that will happen anytime soon, though. Meanwhile, bankers generally appear to be anticipating a continuation of modest economic growth and mild inflation in 1994, with no significant rise in interest rates.
