Banks loosen credit standards as business loan demand gains steam

Bank loans to businesses are on the upswing as competition intensifies to replace the government-backed debt that lenders accrued during the depths of the COVID-19 pandemic.

During the fourth quarter, a net 21.7% of bank loan officers reported higher demand for commercial and industrial loans, up from a net 7.6% who said the same three months prior, according to a recent Federal Reserve survey.

The results represent a bounce-back from the low point of the pandemic in late 2020, when a net 35.3% of loan officers reported that demand was falling.

The same recent Fed survey found that a net 14.5% of loan officers reported easing standards on commercial and industrial loans, a sharp turnaround from the third quarter of 2020, when a net 71.2% of loan officers said they were tightening standards.

“There’s probably a bit less of an idea of keeping the reins pulled in,” Scott Seifers, an analyst at Piper Sandler, said in an interview.

Seifers predicted that demand for business loans will continue to improve during 2022.

The rebound in demand and the weakening of credit standards come as the number of Paycheck Protection Program loans on banks’ balance sheets is dwindling. In some cases, banks may be loosening their underwriting standards to compensate for vanishing PPP loans.

PPP loans have shrunk to just 1% of total loans as banks work through forgiving the remaining government-backed debt, researchers at Piper Sandler said this week in a note to clients. Back in March 2021, PPP loans represented 5.2% of total loans.

“It’s really a matter of banks reversing tight pandemic-era underwriting standards, rather than loosening standards beyond historic norms,” Gita Thollesson, senior strategic business advisor at Q2, said in an email. “Looking ahead, banks are likely to take a more nuanced approach to credit, based on industry.”

During fourth-quarter earnings calls, bank CEOs repeatedly offered brighter — if still somewhat cautious — forecasts for overall loan growth this year, largely on the back of rebounding demand for business loans.

Bill Rogers, CEO of Truist Financial in Charlotte, North Carolina, said during a Jan. 18 call that business clients are borrowing again. Companies want to be prepared to build inventory once supply chain issues are resolved and the recent rise in infections from the omicron variant recedes, he said.

“People are just making the decisions to move forward,” Rogers said.

Other banks that rely heavily on business lending reported rosier outlooks for 2022 on the heels of a busier fourth quarter. William Demchak, CEO of the $560 billion-asset PNC Financial Services Group, said during a Jan. 18 call that commercial and industrial lending “has accelerated for the last bunch of months” across just about every industry type.

At Bank of America, commercial loans grew 9% quarter over quarter, excluding the runoff in PPP debt.

BofA Chief Executive Brian Moynihan said during a Jan. 19 call that a large part of the growth was due to commercial lending through the company’s wealth management business, as rich clients sought to borrow to make bets on certain assets. This growing piece of the commercial lending business is dependent on relationships that grow out of the investments that banks make in their talent, he said.

“This reflects the intense relationship manager effort our teams have done across the last couple of years, and adding more and more relationship managers,” Moynihan said.

The modest rise in business loan demand at the end of the year is “cause for cautious optimism,” Thollesson said in a report to clients.

She warned that commercial deposits at banks increased 15% in the second half of 2021 compared with the start of the year. Until businesses spend this stockpile, forecasts for business loan growth will remain conservative, she said.

But she also pointed out that rising inflation is often coupled with increased commercial and industrial borrowing, as businesses try to lock in their loans before the Fed raises rates.

Even with the Fed poised to raise interest rates next month, the outlook for commercial lending is positive as banks bring underwriting standards back to normal, Thollesson said.

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