What ever happened to the credit crunch?
Two years ago, bankers were being assailed for hampering economic growth with tightfisted lending policies. And, indeed, many banks had pulled back.
Now the lending spigots are wide open.
Banks' holdings of business loans, for example, are up 9% from those a year ago. Home mortgage portfolios have jumped 11%. And credit card receivables have soared nearly 20%
Even commercial real estate lending - the bane of the industry in the early '90s - is showing fresh signs of life. It's up 5% since last year.
Ironically, some of the same people who railed against the credit crunch are now sounding alarms about loose lending.
Consider the views of Alan Greenspan. In November 1992, with the nation struggling out of a recession, the Federal Reserve chairman, observed that "an impressive number of worthy applicants have been rejected" for loans.
Surveying the industry this fall, Mr. Greenspan said that credit standards and pricing had eased so much as "to give a central banker and supervisor pause."
Though credit-quality forecasts are more art than science, there's no denying that banks are cranking out loans.
"Lending is a comeback," exults Frank Lourenso, executive vice president in charge of middle-market lending at Chemical Bank.
The industry's total loans and leases increased by 9% in the 12 months through September, to $2.3 trillion, according to the Federal Deposit Insurance Corp. By contrast, the volume dropped by almost 3% during 1991.
Bankers and consultants give the credit to an economic revival that has spurred everything from homebuying to large corporate expansion.
"Oh, the consumer feels pretty good about himself right now," said William H. Queenan, chief credit officer at Norwest Corp.
To fund the loan growth, banks have been gathering deposits more aggressively and selling off securities amassed earlier in the decade. Banks' holdings of securities declined this year for the first time in the 1990s - down 2% in the six months through September.
The shift generally bodes well for bank profitability, bankers and analysts say.
"It's the normal cyclical experience," said Ronald Mandle, a bank analyst with Sanford C. Bernstein & Co., New York. "Loans are more profitable than bonds."
"In the early '90s, the amount of bonds held by banks was out of line with assets," said Ralph Horn, president and chief executive of First Tennesse Bank. Rotation back into lending "points to stronger earnings," he said, "but only as long as loan portfolio quality stays strong."
That is a considerable "if."
"We have started to see some unsound credit practices in the market," said Mr. Queenan. "Pricing is really very thin, and structure is starting to deteriorate."
Loan rates paid by a wide spectrum of corporate borrowers are down, from the most creditworthy to those below investment grade, according to Loan Pricing Corp., a New York company that tracks lending.
Investment-grade pricing is at historical lows. Also, there is widespread erosion of the usual financial strength requirements for borrowers, experts say.
In the past, these covenants served as an early-warning system to alert banks to trouble at a borrower. "Now, by the time they trip a covenant they are already fallen angels," said Steve Miller, senior analyst at Loan Pricing.
What follows is rundown of the key lending markets.
The picture in large corporate lending is clear: Volume is way up, but pricing and structural strength have eroded. Syndicated loan volume in the United States will end the year with a gain of more than 70%, to $677 billion, according to estimates by Loan Pricing Corp. The growth is particularly noteworthy in leveraged lending, which should triple to $86 billion.
The flip side is that borrowers are able to get concessions on pricing and structure, according to Tom Bunn, director of syndications for NationsBank. One noteworthy example: AT&T Capital was able to shave 33% off of the annual fees on its $1.5 billion loan.
This is in contrast to the situation in 1990 and 1991. Then, said Mr. Bunn, "retrenchment made credits for cyclical industries extremely hard to get done."
The competition seen in large corporate lending has made its way into the middle market, according to Mr. Queenan of Norwest.
A growing number of banks have rediscovered the middle market and are chipping away at the primacy of old-fashioned "relationship lending," bankers say.
But "banks still serve as the primary consultant to their clients in this market," so relationships remain important, said Frank Lourenso, executive vice president in charge of middle-market lending at Chemical Bank.
Loan demand has picked up in the last two years, but may slow, according to Mr. Lourenso, as the bite of higher rates is felt.
Small Business Lending
"It's been good both for the banks and for small business," said Cynthia Glassman, managing director at Furash & Co.
Smaller businesses are benefiting from an increasing focus on that market by banks, which in turn view small business lending as an arena with less competition from nonbank financial institutions.
"There has also been a new understanding that small business lending is profitable when viewed in the context of the whole relationship," said Ms. Glassman.
But price competition is beginning to be a factor in this market as well, especially in the last several months.
This is one area in which growth has been almost constant since the end of 1990. After some stagnation in the first quarter, rising interest rates pushed homebuyers into adjustable-rate mortgages - and thus into the arms of portfolio lenders. At the end of the third quarter, growth was 11% from a year before, to $550 billion.
There have been fears that a slowdown in overall mortgage lending this year may have diluted credit quality.
As well, a contraction in the ranks of mortgage originators and eagerness to lend on the part of many thrifts have brought about a great deal of price competition, especially in California.
Lines of credit are up only marginally from the level a year ago, at $75 billion, and have yet to scale the $81 billion achieved in 1990.
"For lines, the market has really flattened out. Originations continued at a good rate with a lot of refinancings in 1992 and 1993," said David Olsen, president of Wholesale Access, a consulting firm serving the home lending industry.
One developing story is competition from finance companies like General Motors Acceptance Corp. and Household Finance Corp. Though these new rivals have yet to make substantial inroads, Mr. Olsen labels it a trend that bears watching.
Volume of home equity lines may drop next year, experts say, if a flattened yield curve stays in effect. That's because a flat yield curve tends to push homeowners toward fixed-rate amortizing loans, the specialty of finance companies.
Commercial Real Estate
Once anathema to the industry, commercial real estate lending is showing signs of life, with an 8% growth rate in the last year.
The past four months have been "as busy as any time in my memory," said Matthew Gallegan, director of real estate syndications for Bank of Boston. The difference between now and 1990: Lending is secured by larger pools of collateral or is made to corporate entities.
But, said Mr. Gallegan, price competition is rearing its ugly head. "There will be tremendous price pressure in 1995."
Growth in card loans has been very strong, 28% since 1990, to $170 billion. Even more striking is the amount of unused credit card lines. That number now stands at $806 billion, according to bank and thrift call reports, more than double the number at the end of 1990.
The main driver is a robust economy, with wider acceptance of credit cards in a supporting role, observers say.
Another growth factor is the proliferation of rebate programs, which allow consumers to earn goodies as they rack up charges. "With the incentives being offered on credit cards, consumers have switched from cash, even for small purchases, to get a reward," said Anne Moore, president of Synergistics Research, a consulting firm in Atlanta.