Commercial lenders expect the economy to worsen in the first half of 1999, and with it loan volume, bankruptcies, and defaults amid stiffening competition, according to a Phoenix Management Services Inc. report.
In the firm's survey of 89 lenders, 40% said commercial lending would decline, versus 14% who foresaw an increase.
There were even more decisive votes in favor of rising loan losses, bankruptcies, and unemployment (see table).
"Lenders are telling us they expect more of their customers to end up in trouble," said Phoenix president E. Talbot Briddell. "They expect their customers' difficulties to extend to a tightening of credit."
The Philadelphia-based consulting firm, which does a few such mail surveys each year, included 39 commercial banks, 34 commercial finance companies, 13 factoring companies, and three speciality firms in the latest one, conducted last month.
Their bearish assessment was reinforced by another report last week from Veribanc Inc. of Wakefield, Mass. It found banks have not offset the risk of problematic loans with more reserves, though this "safety cushion" remains above limits set by the Federal Reserve.
Veribanc research director Warren G. Heller called the decline of reserves a "mild trend" but cautioned that banks continue to ignore the threat of loan losses as they grab for near-term profits.
"It's the business-as-usual mind-set that's worrisome," Mr. Heller said. "While the Fed has its own requirements that complicate the matter, banks are keeping the regulators and shareholders happy" without regard for overall security.
In the Phoenix survey, 59% said they expect the Fed to cut interest rates in the next six months.
Mr. Heller warned that though they are likely to be right, there is too much dependence on rate cuts for stimulation.
"The markets are fueled by these cuts," he said. "But it's like a drug. After a while you run out of places to cut the rate. You can't cut below zero."
There were indications in the Phoenix responses that underwriting standards will toughen. More than 40% of lenders whose average loan size was greater than $10 million expected to tighten credit standards during the coming six months, compared with only 18% of lenders surveyed six months ago.
More than half of those who responded said they would be less likely to lend to retail, construction, or start-up companies.
Robert Woods, head of loan syndications for the Americas at Societe Generale in New York, predicts absolute loan growth of no more than 1% in the first half of 1999.
"Would anyone suggest the trends we saw in the third quarter were going to reverse?" Mr. Woods said. "The answer is no. The fundamentals haven't changed enough."
He said credit standards are tightening but viewed that as only partly due to fears of a recession. The tightening is "really driven by a need for higher returns."
The Phoenix-surveyed lenders expressed concern about the overall economy, with 48% seeing unemployment rising and none saying it will decline. Also, 72% gave the economy a grade of C or lower for the next six months, up from 62% at the end of the second quarter.
"Kind of bleak," said Chad Leat, co-head of loan syndications at Salomon Smith Barney Inc. "I agree with the broad numbers, but I expect some exceptions."
He said he believes opportunities will be strong for mid-capitalization companies-usually defined as those with market valuations between $500 million and $2 billion. He also expects strong investment from large, uncommitted private equity pools and continued liquidity in leveraged loan and high-yield bond markets.
In contrast to the domestic gloom, even though 80% in the lender survey said international lending would decrease, most agreed that the euro will create vast opportunities in fueling cross-border trade.