Finance Firms Chip Away At Bank's Business Lending

Finance companies have defied the laws of gravity this year.

Despite the free-fall in business borrowing from banks and the commercial paper market, the amount of business credits held by the nation's finance companies has continued to rise in 1991, albeit at a slow pace.

As the amount of outstanding commercial and industrial loans shrank by more than $30 billion in the first nine months of this year, outstanding business credits held by finance companies rose by $15 billion, according to Federal Reserve Board data.

Trend Likely to Continue

Banks' loss of market share to finance companies shows no sign of abating.

Though finance companies are certainly not immune to the kinds of asset quality problems afflicting commercial banks, these companies generally are in better shape right now - and in position to exploit their growing competitive strength.

"We're not as concerned about the impact of nonperforming commercial real estate and HLT-type loans on the balance sheets of finance companies as on commercial banks," said John Lonski, senior economist at Moody's Investors Service.

That's because finance companies didn't go into these areas to the same extent as the banks, he added.

Enviable Credit Rating

Westinghouse Credit Corp. stumbled badly by making a lot of commercial real estate loans that have since gone sour.

Despite its problems, though, the single-A credit rating of Westinghouse is the envy of some of the nation's biggest commercial banks.

Meanwhile, General Electric Capital Corp. has made no secret of its interest in buying some of the assets of Westinghouse Credit.

GE Capital has been closing in on General Motors Acceptance Corp. as the nation's biggest finance company, and the purchase of Westinghouse assets would bring it even closer.

The gap between General Motors Acceptance and GE Capital, ranked first and second, respectively, narrowed markedly in 1990, according to a survey by American Banker.

Business Credits

When it comes to business lending, the gap is also narrowing between finance companies and commercial banks.

At the end of September, domestic finance companies had a total of $307.6 billion of outstanding business credits on their books.

That amounts to roughly half of the $619.9 billion of outstanding commercial and industrial loans held by domestically chartered commercial banks.

Put another way, finance companies accounted for 33.2% of the total, up from 31% at the end of last year, and 23.8% at the end of 1985.

In the current risk-averse environment, banks have been adding treasury securities to their balance sheets, rather than loans.

"Finance companies are happy to let banks lend to the government [through the purchase of treasury securities] while they lend to the private sector," said Roger Brinner, chief economist at DRI/McGraw-Hill Inc. in Lexington, Mass.

Leonard Machlis, executive director of the Commercial Finance Association in New York, said banks have created a void that finance companies seem happy to fill.

"It's being handed to them on a silver platter," he said of the new business coming their way.

Option for Spurned Lenders

Norman Treisman, president of Philip Morris Capital Corp. in Rye Brook, N.Y., cited several cases in which the finance unit of Philip Morris Cos. has picked up customers that were rebuffed by banks.

"In one case, the bank reached its legal lending limit and wanted out," he said.

At the same time, though, "I wouldn't say the floodgates have opened," Mr. Treisman added.

Mr. Machlis said there has been a big increase in the number of small, independent finance companies that have sprung up across the country to lend to small businesses that have been spurned by banks.

These finance companies, though, have had problems of their own in getting bank funding.

"We know banks are emphasizing credit quality, and cutting back credit availability, especially at medium and smaller size companies," said Norman Robertson, chief economist at Mellon Bank in Pittsburgh.

He said the curtailment of credit has been "quite severe," and has hurt the economy more than is widely realized.

Though finance companies have taken up some of the slack, Mr. Robertson said they, too, are subject to the same climate of caution on the part of lenders.

Whether finance companies continue to gain market share from commercial banks will depend in large part on how well their credit ratings hold up relative to the banks, said Moody's Mr. Lonski.

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