For the past year, banks have seen strong demand for commercial and industrial loans from large and midsize companies. Still on the sidelines, though, are small businesses, which have shown no urgency to tap existing credit lines and take advantage of cheap capital.
"We have a lot of small customers with revolving lines of credit and they just aren't using them," says Bill Thackery, executive vice president and chief credit officer at $98 million-asset Friendly Hills Bank in Whittier, Calif. "I think so many small companies were hurt so hard this time around that they are reluctant to put up capital for expansion or incur debt right now."
The main reason businesses remain reluctant to borrow is that profits remain weak and many simply can't justify taking on new debt. An uncertain political climate and the Federal Reserve's decision to keep interest rates low for the next two years — lessening the need to borrow now — are also suppressing demand.
"Almost all of the growth is in larger credits and by definition it means there are fewer borrowers to go with those," says Chris Newbury, an associate director at the Federal Deposit Insurance Corp.'s division of insurance and research. "It suggests most of the growth is going to be at the bigger banks. For small banks, it's harder for them to make bigger loans."
Overall, total C&I loans at U.S. banks and thrifts climbed 15.1% in the second quarter from the same period last year, to $1.18 trillion, the FDIC said this week in its quarterly report on industry trends. Quarter over quarter, total C&I loans rose 3.6%.
However, banks with total assets of less than $1 billion grew their C&I loans by 1.8% in the second quarter, on a merger-adjusted basis, the FDIC data shows.
Steve Brown, the president and CEO of Pacific Coast Bankers' Bank in Walnut Creek, Calif., says large companies are expanding their credit lines for a wide range of activities including buying equipment, upgrading technology and financing bonds.
Global dynamics also may come into play since large firms are looking to refinance existing debt by accessing "very cheap levels of capital," he says.
Loan demand by large firms may also reflect pent-up demand and the fact that banks are being assertive about capturing whatever borrowers they can during the recovery, says James Chessen, the chief economist at the American Bankers Association.
"It is a pretty dramatic increase but it's not out of line from what you'd expect a year or two following a recession as banks put losses behind them and look aggressively for good loans to make," Chessen says.
The last time commercial and industrial lending surged was in late 2008, when large companies were drawing down credit lines because they needed access to cash at the start of the financial crisis. Lending still has not returned to those levels, Chessen says.
On the small-business side, Chessen blames some of the tepid loan demand on continued low interest rates.
"We're in an unnatural situation where rates are too low, which creates perverse incentives," he says. "There's no urgency on the part of businesses to borrow and that is not helping the economy or banks,"
Some observers also suggested that small-business demand might pick up if banks loosened the spigot a bit. Many banks tightened their lending standards following the recession and remain reluctant to lend to all but the most creditworthy firms.
"We are often contacted by people who just don't qualify for capital," says Bryan Shaffer, a vice president at thereal estate consulting firm George Smith Partners in Los Angeles.
Adding to all the anxiety are the upcoming elections and the looming "fiscal cliff," in which lawmakers could be forced to dramatically cut the U.S. budget deficit through spending cuts and tax increases. Inaction could plunge the country back into recession, further stifling small-business growth and slowing momentum at larger firms, observers say.
"I'm very pleased to see such a strong increase in C&I loan growth, but can it be sustained with so much uncertainty converging at the end of this year?" Chessen says.
"Small businesses aren't borrowing and they won't until after the election," adds Pacific Coast's Brown. "Businesses are still worried."