Outside of PPP, it's crickets in small-business lending
Supply and demand for small-business loans outside of the now-idling Paycheck Protection Program have been lackluster — and should remain that way for the rest of 2020.
A blurry economic outlook, marred by the uncertainty of the coronavirus pandemic, is reducing banks’ risk appetite. At the same time, demand for non-PPP loans has cratered as businesses freeze investment plans and cut costs.
The Federal Reserve’s Senior Loan Officer Opinion Survey for July found that 70% of lenders tightened underwriting standards for loans to small businesses. Demand from those clients plummeted by 29% between April and July.
A separate survey by Biz2Credit determined that the approval rates for small-business loans had fallen from 28.3% in February to 13.8% in July at banks with more than $10 billion in assets. Smaller banks, which approved half of their applications in February, signed off on less than a fifth of them last month.
“Standards have tightened and demand has declined to levels not seen since the great recession,” the research team at Raymond James said in an Aug. 3 client note. “We expect conditions to remain tight with limited demand for new loans … until a resolution of the pandemic becomes apparent.”
While the surveys didn’t break out trends by borrower size, Gita Tholleson, a senior vice president at PrecisionLender, said standards tend to be the tightest for the smallest commercial borrowers.
Without credit, many small businesses will struggle to survive. And a dwindling pool of qualified borrowers would pinch the banking industry’s ability to grow and produce profits and investor returns.
A July survey by the National Federation of Independent Business found that roughly a third of small businesses reported that sales fell by 26% to 50% from a year earlier; 21% said sales were less than half of what they were in July 2019.
Nearly a quarter of small-business owners said they will have to close if economic conditions do not improve over the next six months. Another 22% warned they may not last a year.
To be sure, banks made billions of dollars in loans under the PPP, but the program is on hold for now and the loans are expected to roll off of balance sheets in coming months.
A key challenge for lenders when it comes to traditional loans is pricing in risk, which has been complicated by uncertainty over how long the pandemic will last, its severity and its overall impact on the economy.
“It's still pretty murky out there,” Michael Scudder, chairman and CEO of First Midwest Bancorp in Chicago, said on the company’s recent earnings call. “As a practical matter, there's absolutely no one who can predict the future in this type of environment.”
Total loans at the $21 billion-asset First Midwest, excluding PPP, fell by 1.5% from a quarter earlier to $13.8 billion on June 30.
“So obviously the environment, to a degree, caused a pause on our part,” Scudder said.
The $6 billion-asset Heritage Financial said its non-PPP loans fell by 1.1% from the first quarter to $3.8 billion, largely because of a reduced demand. Executives said during the Olympia, Wash., company’s quarterly call that pipelines were down from the prior quarter and a year earlier.
“New loan demand has been impacted by COVID-19, with many customers putting capital projects [and] expansion plans on hold,” said Bryan McDonald, Heritage’s chief credit officer.
“Loan growth is just going to be generally flat,” said Heritage CEO Jeffrey Deuel. “The situation we find ourselves in is, obviously, a difficult time to be approving new loans with all the uncertainty.”
Even banks with lending opportunities are cautious about their ability to close those loans.
While the $22 billion-asset Old National Bancorp ended the second quarter with a healthy lineup of loan prospects, its non-PPP loans fell by 2.2% from a quarter earlier to $12.1 billion.
“Economic uncertainty may impact pull-through rates and mute loan growth in the near term,” Chief Financial Officer Brendon Falconer said during the Evansville, Ind., company’s earnings call.
With widespread virus outbreaks in July and continuing into August across much of the country, a sustained economic recovery appears reliant on efforts to combat the pandemic, Fed Chairman Jerome Powell said during a press conference last week.
“The path of the economy is going to depend to a very high extent on the course of the virus, on the measures that we take to keep it in check,” Powell said. “We can’t say it enough.”