Memo to the silver-lining department: check out the equipment financing business.
Though there has been little good news for banks during the long recession, some lenders are seizing on an opportunity as more cash-strapped businesses shift to leasing — rather than buying — computers, forklifts, trucks and other necessary equipment.
Some lenders with equipment financing subsidiaries, such as TCF Financial Corp., MB Financial Inc. and BB&T Corp., say business is up this year. Though the overall equipment lending market was off dramatically this spring compared with the previous year, industry watchers expect that to change as more businesses turn to equipment leasing to stay afloat or even try to grow during the recession.
That trend could prompt more banking companies to ramp up their equipment lending as they look for profitable new business niches.
"It's cheaper for companies to lease something generally than to own it," said Anthony Davis, an analyst with Stifel, Nicolaus & Co. "Leasing, as a lending activity, is one of the few bright spots that banks can point to right now."
Kenneth E. Bentsen Jr., president of the Equipment Leasing and Finance Association, agreed. His trade group represents more than 700 financial firms and service providers in the estimated $650 billion equipment finance market.
"Our members think there might be an uptick" in equipment leasing, Bentsen said. "The other [thing] is we are hearing from our members that they are seeing a lot more deals stay in place on leases, where in the past a company might want to upgrade the equipment, whether it is trucks or computers or whatever. They're inclined to extend the lease."
The equipment lending market has contracted sharply as banks tightened lending standards and fewer businesses took out loans to secure new equipment. The Equipment Leasing and Finance Association's index tracking lending activity at 25 of the top equipment lenders was down 41% in May from a year earlier, to $4.2 billion. In a sign that things may be bottoming out, lending was actually up 2.4% from a month earlier, after falling 12.8% in April.
"People say they think their lease business is going to increase," Bentsen said.
Leasing is an attractive option for borrowers for a few reasons. Securing a lease loan does not typically require a hefty down payment the way a purchase loan does. Also, leasing has favorable accounting benefits. A lease can be booked as an operating cost, rather than debt. That means a lease doesn't hurt a company's debt-to-earnings ratio or other measurements used by ratings agencies and lenders to assess a borrower's health.
Equipment leasing is equally attractive for lenders right now, Davis said, as there appears to be a groundswell of demand building and spreads on such loans are at a 10-year high.
Also, some of the major players in the market — like General Electric Co.'s lending arm, GE Capital, and CIT Group Inc. — are retrenching because of broader problems. That creates an opening for smaller lenders to take market share and for new companies to enter the market, Davis said.
Take TCF Financial, whose leasing and equipment book grew by 12.2%, to $2.86 billion, during the first quarter. Meanwhile, the Wayzata, Minn., company charged off just 0.71% of its equipment loans, compared with 1.22% of its consumer real estate loans.
Jason Korstange, a spokesman for the $18 billion-asset TCF, attributed the growth in its leasing book to new business and to a portfolio of leases it acquired in the first quarter. TCF hired about 35 equipment loan officers as part of that transaction and is looking for other deals, he said.
"All we're doing right now is trying to take advantage of the fact that we have capital available and we have liquidity," Korstange said. "We are seeing some opportunities that we haven't seen in the past."
Davis expects the companies with deep experience in equipment lending to be the main beneficiaries, as equipment lending can be tricky for the uninitiated. Equipment lending is "not a business that you just jump into, because you can lose your shirt," Davis said.
Success hinges on accurately gauging how much a piece of equipment will be worth in two or three years after a lease expires, which can be tough given how demand fluctuates and products wear down. If a borrower does not repay a secured-lease loan or fails to extend the lease or purchase the item, a bank faces the prospect of charging the equipment off if the appraisal was too high.
Still, equipment leasing can be relatively safe and profitable for those who have experience, said Brian Griffin, senior vice president of lease banking at the $9 billion-asset MB Financial. The loan portfolio at Griffin's group, which extends loans to lease financing companies, grew by 13.6%, to $738.5 million, in the first quarter.
"As credit markets have tightened there has been a contraction of [funding] sources," Griffin said. "We have seen a large number of leasing companies come to us that maybe were going to other sources in the past."