The falloff in banks' business loan portfolios eased markedly in 1992 from the prior year's steep decline, according to an American Banker survey.

Commercial and industrial loans held by the nation's top 100 business lenders slipped 3.5% last year, to $357.8 billion, after a 7.2% decline in 1991.

For all banks, the amount of outstanding business loans fell 4% in 1992, to $536.4 billion, after a 9.2% drop in 1991.

A Lagging Indicator

Economists expect the protracted decline to bottom out later this year or in early 1994. They said business tending is a lagging indicator, and should turn around as the economy picks up steam.

The most recent data from the Federal Deposit Insurance Corp. on outstanding C&I loans suggest that the bottom has just about been reached.

At the end of the first quarter, outstanding business loans held by FDIC-insured commercial Banks stood at $533.9 billion, off 3.2% from a year ago, but down an almost imperceptible 0.4% from the yearend 1992 level.

"At some point in a growing economy, you do need money to finance inventories and receivables," said Irwin Kellner, chief economist at Chemical Banking Corp.

A rebound in inventories typically leads to increased demand for business loans.

"I think the economy is now showing enough sustainable growth that some inventory rebuilding is likely during the second half of this year," added Edward Yardeni, chief economist at C.J. Lawrence Inc.

Demand Remains Spotty

For now, though, loan demand remains spotty. And with more banks anxious to start lending again, competition is getting fierce.

"We're seeing some banks calling very aggressively on our customers," said James Menzies, chief credit officer at Keycorp in Albany, N.Y.

In the Northeast, Keycorp competes with the likes of Fleet Financial group, Bank of Boston Corp., Bank of New York Co,. and Chase Manhattan Corp.

Bad Loans Decline Sharply

"We're just seeing them saying, okay, we're back in the market. here we are." Mr. Menzies said.

Absent a surge in loan demand, which doesn't appear likely, increased competition among lenders could pressure credit standards.

As it was, the nation s top 100 business lenders ended 1992 in much better shape than when the year started.

The amount of sour business loans on their books fell to $12.6 billion from $17.3 billion in 1991, according to the American Banker survey.

Competition Pressures Pricing

Noncurrent business loans as a percentage of total business loans fell to 3.51% from 4.66%. Net chargeoffs declined to $4.7 billion from $6.6 billion at the top banks.

Bankers around the country confirmed that increased competition is already putting pressure on loan pricing.

Robert Griffin, executive vice president for corporate banking at Continental Bank Corp. in Chicago, said his company is trying hard to hold the line.

Continental has been dropping some business customers whose loans are not providing it with an adequate return.

At the same time, Continental added 150 new business borrowers to its customer base last year, including about 50 middle-market companies in the Chicago metropolitan area" Mr. Griffin said.

"I think the Midwest is pretty solid right now," compared to some other parts of the country, he added.

Still, Continental's portfolio of business loans fell by more than 11% in 1992 - to $7.9 billion from $8.9 billion in 1991.

As was the case with many other banks, the booming public debt markets siphoned off some of Continental's business last year, a trend that is continuing this year.

In the Southeast, meanwhile, some banks racked up big increases in their business loan portfolios last year.

Big Gains in Georgia

At NationsBank of Georgia, outstanding C&I loans rose by 39.4% to $3.7 billion. Wachovia Bank of Georgia's business loan portfolio soared 44% to $2.4 billion.

"Clearly, this is one of the most attractive markets in the country right now," said Keith Lawder, senior vice president and group executive at Wachovia's Atlanta office.

At Keycorp, Mr. Menzies said the bank holding company expects its business loan portfolio to grow by 5% to 6% in the Northeast this year.

Keycorp's banks in the Northwest will probably register growth of 6% to 8%, while its banks in the Rocky Mountain states are expected to have somewhat higher growth.

After the wrenching credit problems of the past several years, bankers today are "still cautious but no longer paramoid," said Mr. Menzies.

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