Commercial borrowers are leaning heavily on their credit lines, according to data released last week by the Risk Management Association and Automated Financial Systems Inc. Fourth quarter statistics showed the composite average utilization rate under lines of credit jumped to 47.5 percent, up 18.6 percent from a year earlier. “The percentage of middle market loans on nonaccrual rose for the eighth consecutive quarter, and is now 1.5 percent of total outstanding balances,” the report states, a year-over-year increase of 127 percent. Loans 30-89 days past due doubled to 1.25 percent in the same period.
“It’s safe to say that with the Lehman event, conditions really changed,” says Risk Management Association president and CEO Kevin Blakely. Banks have been anticipating this weakness, and have been adding to their loan loss reserves since early 2008. Reserve building “comes in three waves,” notes Blakely. “First there’s the optimistic wave, then the wave when banks realize they really have some problems.” During the third wave, banks see a turnaround but continue to build reserves “as a clean-up.”
Loan default rates will continue to climb through 2008 and into 2010, along with middle market bankruptcies. The weakness in the construction sector “stands out remarkably,” Blakely says, including builders, contractors, and suppliers in residential and commercial real estate. For now, this crunch “is still not 1990, 1991, or even 2001, but we are at an early stage,” cautions Blakely.
Fresh lending is holding up fairly well, meanwhile. “It’s surprising how much new money is going out,” he says. “Each quarter was higher than the level seen in the fourth quarter of 2007—a hair above $100 billion in third-quarter of 2008 and a hair below $100 billion in the fourth quarter. And that excludes draw-downs of existing credit lines.” The perception of frozen credit arises from the shutdown of the capital markets, Blakely believes. “Before the capital markets closed, banks accounted for about 40 percent and the capital markets 60 percent. Today everybody’s rushing back to the banks, but they don’t have the capacity.”