The portion of bank loans going to clients rated single-A or better has been on the rise, according to a new index.
The percentage of bank loans to the better rated clientele surged to 51.0% from 40.6% in the last year, while loans to all other categories of borrowers declined, the new Citibank Loan Index shows.
Bank officials, who are using the index to compare trends in Citicorp's own portfolio to those in the industry at large, said the shift reflects extremely competitive pricing of loans by banks.
They added that many of the better rated companies, having issued commercial paper in 1993, have since refinanced with bank loans.
Trends in the commercial and industrial loan market have historically been difficult to track. Typically, banks have compared the performance of their own loans in any given year to those made in previous years, but that hasn't told them about how their performance compares to the market as a whole.
The loan index is intended to serve the same function as an inclinometer on a sailing ship. Just as an inclinometer shows the position, or heel, of a boat relative to the horizon, the loan index will help a banker judge whether a portfolio is in proper balance relative to the universe of commercial lenders.
The index tracks 1,700 loans totaling over $500 billion in commitments to more than 1,000 corporations.
It was designed by Citibank in February of 1993 to function as the Lehman index does for fixed income investments or as the Standard & Poor's 500 index does for equity investments.
Citibank officials also hope the existence of the index will increase liquidity in the secondary loan market, which has grown steadily from $5 billion in 1990 to a projected $25 billion this year, by making loans more comprehensible as an asset class.
Without a frame of reference, it has been difficult to compare the performance of the individual loan portfolios to each other, much less to other investments in general.
For primary loan providers, the index could replace the current method of evaluation. Historically, bankers have looked at loans outstanding and nonperforming loans and tried to determine the direction of the market.
"When nonperforming loans improve, the supposition is that the rest of the portfolio is improving," said Rod Ballek, the managing director of portfolio management for Citibank's North American Global Finance business.
"When they deteriorate, the sense is that the rest of the portfolio is deteriorating."
Mr. Ballek, who helped develop and design the index, said it will help bankers see directional movements in the market as a whole, well before the nonperforming loans improve or deteriorate.
In the last year and a half, Citibank also has used the index to determine appropriate pricing.
After looking at total return, the bank examines spreads and fees and aligns them with the appropriate risk ratings. The information is used to demonstrate the appropriateness of spread charts to the client and the investor.
At the end of September this year and December of last year, North American Global Finance, which represents a subset of Citibank's commercial loans excluding international and real estate loans, returned two basis points below the index.
In December, the unit produced a total return of 6.22%. In September, the return for Citibank's loan portfolio was 5.43%.
Elliot Asarnow, head of the portfolio strategies group, isn't particularly concerned that the bank's own portfolio hasn't exactly tracked the index. Rebalancing a portfolio the size of Citibank's can't be done in a week, he pointed out.
"We're trying to start from ground zero as an industry," he added.
"We've got a long way to go before the question [of how closely the bank follows the index] becomes a potential problem."