Banks get tougher on business loans

Lenders are tightening the credit spigots for businesses, raising concerns about an economy that’s already facing global headwinds and a rising risk of recession.

The Federal Reserve’s senior loan officer survey, due out Monday, is expected to show that banks toughened their corporate and industrial loan standards for the fourth straight quarter in the April-June period after easing them since early 2010. In the first quarter, 13% of banks tightened credit conditions for loans to midsize and large businesses, while just 1.4% loosened them.

The trend is worrisome because credit greases the wheels of the economy, allowing many companies to buy products and supplies, hire and expand.

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Lenders’ greater caution is largely a byproduct of the oil industry downturn, analysts say. Banks expect delinquencies and charge-offs in the oil and gas sectors “to deteriorate over 2016 and noted that they were undertaking several actions to mitigate the risk of loan losses,” according to the Fed’s first- quarter loan officer survey.

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Mark Zandi, chief economist of Moody’s Analytics, downplayed the concerns, saying the stricter lending standards are mostly being applied to energy-related loans and leveraged corporate buyouts.

Others, however, say the heightened vigilance is also affecting other sectors. When oil and gas companies don’t pay their bills, their suppliers typically get squeezed as well, UBS research analyst Brennan Hawken says.  And lenders burned by loan defaults often grow more conservative, UBS credit strategist Stephen Caprio says.

For now, lenders’ prudence appears to be mostly affecting riskier borrowers. In the large corporate market, the issuance of high-quality, low-risk bonds is up 3.3% for non-energy companies and down 38% for energy-related firms, UBS figures show. But for high-yielding “junk” bonds, which finance riskier companies, issuance is down 35% for all borrowers.

Joe Lavorgna, chief U.S. economist of Deutsche Bank, says bank lending officers are also worried about the prospect of a slowing economy. “They’re not confident in their outlook and so (lenders) are going to be more cautious.”

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At the same time, banks are being pinched by narrow net interest margins due to the Fed’s low interest rates and its recent forecast that rates will rise more gradually than anticipated. Large banks also must hold more capital against loans under reforms prompted by the financial crisis. As a result of both developments, many banks are dialing back loans to borderline borrowers, says Rohit Arora, CEO of Biz2Credit, which connects small firms with lenders.

Some small businesses, in turn, are getting a chillier reception  when applying for loans. In the first six months of this year, an average 4.2% of small businesses said their borrowing needs weren’t satisfied, up from 3.1% during the last six months of 2015, according to the National Federation of Independent Business’ monthly survey.

“Customers (with average credit) that would have been approved … a year ago are having a much tougher time” with both banks and some online lenders, says Ami Kassar, CEO of MultiFunding a loan adviser for small businesses. Commercial real estate loans, he says, are even more elusive because of bank capital requirements enacted early last year.

Michael Hobbs, president of Chicago-based PahRoo Appraisal and Consultancy, says the firm’s revenue has grown about 10% a year, but annual sales would increase by 50% if he could secure a $75,000 line of credit to hire three more appraisers.

Last year, he says, banks assured him he would get the loan if he continued to boost revenue. But they recently told him the company lacks enough hard assets for collateral, adding they’re worried about an economic slowdown.

“We’ve seen a shift,” he said. “It’s a massive amount of frustration.”