Asset-based lending: The post-crisis landscape
Many lenders today may feel a little bit like Max, Mel Gibson’s iconic character in the 1980s futuristic sci-fi movie trilogy Mad Max. In the same way that the post-apocalyptic landscape faced by Max was a far different world than existed before, the post-financial crisis lending landscape is far different from what existed before 2008.
This is true for all types of lenders, including both commercial banks and asset-based lenders. Since the onset of the financial crisis more than three years ago, virtually everything about commercial lending has changed. This includes much stricter credit criteria and more risk aversion on the part of lenders, as well as enhanced regulatory scrutiny on lenders.
In particular, federal regulators now require that commercial banks’ loan portfolios be more diversified. Specifically, regulatory guidance now caps the amount of capital that can be invested in commercial real estate (CRE) and acquisition, development and construction (ADC) loans as a percentage of total capital. A natural result of this has been a renewed emphasis by banks on commercial and industrial (C&I) loans.
“C&I loans are replacing CRE and ADC loans in our portfolio—we’re slowly shrinking that bucket,” says David Wooding, a senior vice president with The Columbia Bank, a commercial bank in Columbia, Md., with $2 billion in assets. “While there is definitely pressure to grow our C&I loan base, it’s a longer sales cycle. Banks in general are scrutinizing credits more closely today in light of the underlying weaknesses in the economy.”
“Most banks are in the ‘stealing’ business right now when it comes to C&I loans,” says Jeffrey Covington, senior vice president with NewDominion Bank, a community bank in Charlotte, N.C. with $400 million in assets. “It’s no secret that CRE loans are passé and C&I is the way to go for the foreseeable future. All the banks here in Charlotte, from the big mega-banks to the small community banks, are out trying to find good manufacturing and distribution companies and business services and professional firms that need owner-occupied real estate loans, equipment loans and lines of credit.”
However, with little credit demand among these segments for new buildings and equipment or expanded credit lines, Covington says he and most other bankers are trying to woo clients from each other based almost exclusively on service and rate. “While the turmoil in the banking industry can sometimes expose holes in service, it’s much harder to gain the favor of a new client without a fresh credit need to help pry them away.”