Business has perked up for Standex International Corp., so the firm has boosted its bank borrowing. Over the last 12 months, Salem, N.H.-based Standex has drawn on its short-term credit lines by an extra $10 million or $15 million compared to the year before.

The industrial equipment maker, with about $500 million in annual sales, has used funds borrowed from lenders including Bank of Boston and Bank of Tokyo to finance the start-up of a new line of commercial refrigeration equipment.

"The economy is coming back to a reasonable degree, so we have increased our debt," said Lindsay M. Sedwick, Standex' treasurer.

These days, many companies like Standex exist in the marketplace. Bankers report a cyclical recovery in loan demand began taking shape more than a year ago as consumers stepped up their borrowing.

Now, commercial borrowers are joining in, and the pickup in loan volume is gathering steam. That bodes well for a banking industry already booking record profits, yet hungry for revenue.

"Loan growth should be driving bank earnings pretty dramatically in the next year or so," said Robert B. Albertson, an analyst at Goldman, Sachs & Co.

After a punishing recession and a wave of corporate restructurings, business conditions are improving in most parts of the country. Businesspeople are feeling more confident about the recovery's durability, and that is prompting-them to borrow in order to build plants, expand production lines, accumulate inventory, and carry out acquisitions.

"The appetite for credit is quite robust," said John K. Giannuzzi, corporate finance chief at Bank of Boston, Standex's lead lender.

Total bank loans have grown a snappy 8%, annualized, in recent months, according to Federal Reserve data. Credits to commercial borrowers, after lagging the rebound in consumer lending, have spiked up since spring and in July shot ahead at a greater than 17% annual rate.

"We are seeing growth across the board, with the exception of residential mortgages," reported Mickey W. Dry, chief credit officer at North Carolina-based Wachovia Corp. "The trends are more pronounced in the corporate portfolio."

With loans to businesses leading the way, analysts forecast continued credit growth in the high single digits, perhaps touching double-digit levels, for the rest of 1994 and on into next year.

To be sure, the lending surge, like the broader recovery of the U.S. economy, has not reached a boom level. GrOwth is only about average by historical standards.

What's more, the Federal Reserve is a wild card that could cut short the recovery. If the central bank continues to raise interest rates, credit demand will be choked off at. some point.

Currently, the lending rebound is in an early stage. Banks are flush with cash, and borrower appetites for credit haven't yet caught up with banks' readiness to lend. "There are still too many lenders and too few borrowers," complained Mr. Dry.

That is generating fierce competition, especially in lagging markets such as California and New York, putting intense pressure on loan terms and pricing.

"Everybody is going after everybody's customers," said Robert M. Walker, vice chairman of San Francisco-based Union Bank. "If one guy says, 'I want a guarantee,' another guy says, 'I don't need a guarantee.'"

Frank Lourenso, chief of the Chemical Banking Corp. unit that does business with mid-sized companies in the New York metropolitan area, said: "We are not about to lose any relationships on pricing or covenants."

The recovery of loan demand has been uneven, with the South and center of the country far ahead of the Middle Atlantic states or California. In the Midwest, headquarters for much of the country's heavy industry, "the lending market is very strong," said Joseph J. Buttigieg, Michigan corporate banking chief at Detroit-based Comerica Inc.

Automakers and their suppliers have gone to three shifts and are adding plants and equipment as demand for U.S.-made vehicles has soared, he noted.

Mr. Buttigieg said pressures on loan terms and pricing exist in Michigan but are still "reasonable." He expects Comerica's corporate loan portfolio to grow 8% to 10% this year, he said.

But in the Golden State, still reeling from the Worst recession in half a century, business conditions remain sluggish. "California is different," noted Mr. Walker of Union Bank. "We don't have much demand."

Yet even in California, signs of a lending recovery can be seen. In the San Francisco Federal Reserve district, which is dominated by California, loan volume started to grow during the second quarter after a long decline.

Unlike the pattern in other regions, loans to California businesses turned the corner before consumer credit did. That's because the fortunes of many companies are tied to the national economy, while individuals remain wary of the state's high unemployment rate.

The Middle Atlantic region also lags the nationwide recovery but is now experiencing growth. At Chemical, most of whose business is done in the New York-New Jersey area, companywide loans grew in the March-to-June period for the first time in many quarters.

Credit card debt and other consumer borrowing grew fastest at Chemical. But Mr. Lourenso said he noticed a revival in commercial demand during the spring, and he predicted growth of 5% to 6% in his middle-market portfolio during the next year.

"Our customers are feeling better, and it has definitely picked up," he noted. "The summer has been very good."

Chemical's customers are borrowing "to support increased business activity," adding to inventory and receivables. Mr. Lourenso explained.

The trend is spread across a variety of industries, including retail, apparel, beverages, and such specialty businesses as pet accessories. Analysts say such gains m loan volume are exactly what banks need to keep profits growing.

During the last two years, the industry had pushed up earnings thanks to low interest rates, efficiency gains, and credit-quality improvements.

Until early 1993, total loans in the banking system had actually been falling. Commercial credits didn't start growing again until the beginning of this year.

Today, the rebound in loan volume is accelerating just as interest rates move up and gains from lower credit costs start to fade. Profits may rise not only because of higher volume but also because banks are substituting loans for lower-yielding assets on the balance sheet.

When credit demand was weaker, banks built up big portfolios of relatively low-yielding securities. Now, banks are funding additional lending by trimming their securities holdings. "As loans grow, banks can replace liquid assets, producing a better earnings mix," noted Montgomery Securities analyst J. Richard Fredericks.

That process of replacement is leading some analysts to forecast flat or modestly wider interest margins despite rising interest rates.

Still, gains may be limited by the cut-rate prices banks are sometimes accepting on loans. Bank of Boston's Mr. Giannuzzi said he noticed "significant price erosion" in corporate credits over the past year.

Some analysts argue that pricing pressure will partly offset the benefits of higher loan volume. "The stories you hear about competition for loans [have] got to temper your views on margins," said David S. Berry, an analyst at Keefe, Bruyette & Woods, Inc.

But others maintained that greater need for credit would eventually give banks a stronger hand. "Borrowers will put enough demand into the system to reduce pricing pressure," predicted Mr. Albertson of Goldman, Sachs.

A more troubling issue concerns the quality of the loans banks are booking. Bankers generally claim they are avoiding the excesses of the 1970s and 1980s, when credit losses periodically ravaged industry profits.

But many in the industry say they worry about the alacrity with which some lenders are loosening loan terms and conditions. When the business cycle turns down a few years from now, as it inevitably will, they warn that some of those loans will go sour and the lenders won't have adequate security.

Said Wachovia's Mr. Dry: "People need to keep in mind that tomorrow's problems are being planted today."


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