The Wall Street Journal
By: Ruth Simon
April 21, 2011
Three years after credit markets froze, two crucial forms of bank lending that remained stubbornly weak are finally showing signs of life, another indicator that the credit crisis is on the mend.
Small-business lending and the use of existing lines of credit, both slow to rebound, are showing faint but intelligible signs of recovery.
An uptick in the two forms of lending could help businesses expand and reduce unemployment, which are crucial to a broader economic recovery. Commercial and industrial lending, the most widely tracked measure of business-loan demand, had already improved at the end of last year, and growth continued for the second quarter in a row.
But the rebound in lending remains in its early stages, with credit growth more anemic than in past recoveries.
"We are seeing a pickup, but it's still tenuous," said John Daniels, credit products executive for commercial banking at Bank of America Corp.
Still, some banks are reporting the first signs of a reversal of the downward trend in the small-business sector, where lending dropped 10.5% between March and December 2010 at the biggest banks, according to an analysis by the Federal Reserve Bank of Kansas City.
Small-business lending typically is much smaller than commercial and industrial lending for large banks. J.P. Morgan Chase & Co., for example, had $38 billion in loans outstanding to companies with $20 million to $500 million in revenues at the end of the first quarter, compared with $17 billion in loans to smaller firms.
But banks are eager to build their small-business loan portfolios. At Cleveland-based KeyCorp, for example, loans backed by the Small Business Administration posted an 11% year-over-year gain in the first quarter and other small-business lending showed a similar rise.
"For the first time in a long time ... applications and approvals are up," said Maria Coyne, head of business banking. Growth is being driven by debt consolidation, equipment purchases and commercial real estate and, in many cases, reflects new demand, she said.
Earlier this month, KeyCorp approved a $2.6 million loan for Rumors Salon & Spa Inc., located just outside Albany, N.Y., which has more than $3 million in revenue. Rumors will use the funds to construct a 10,000 square-foot building. "It's a great time to borrow money if you have the courage and guts to do it," said Rumors co-owner Marri Aviza.
At U.S. Bancorp, small-business loans outstanding generated by metropolitan branches and in-store locations grew 22% from a year earlier, far outpacing a 4.5% increase in commercial lending. That was largely due to gains in market share. But existing customers also are taking out new loans, said Chief Financial Officer Andy Cecere. "We're also growing our core customer base."
Demand may be picking up, but not necessarily from borrowers that banks deem qualified. Nearly 30% of small businesses surveyed by Greenwich Associates had applied for credit in the first quarter, up from 15% in the fourth quarter of 2010 and 5% in the third quarter. But approval rates slipped to 55% from 69% over the course of the year, the consulting firm said.
That explains why some borrowers find small-business loans hard to land. Michael Sinensky, owner of Disco Sushi, which runs nine bars in New York, said his business was turned down last year when it applied for a $500,000 credit line. The company's numbers for 2008 "weren't what they needed to be," Mr. Sinensky said, adding he was told to resubmit his application with his 2010 tax returns.
Mr. Sinensky said he is hopeful that his request will be granted this year. "Everyone thinks the climate is getting better, but it's not getting better for small business," he said.
At the same time, some lenders say they are also beginning to see modest upticks in credit usage, a criticial measure of loan demand. At Bank of America, businesses tapped an average of 35% of their credit lines in the first quarter, up from 32% a quarter earlier. Wells Fargo & Co. saw usage rates increase 0.5 percentage point to 33%.
At J.P. Morgan Chase, credit use rose by one percentage point to 35%. "It's a big turn," said Todd Maclin, head of the commercial bank. The rate had been flat or falling since the third quarter of 2008.
Trek Bicycle Corp., a Waterloo, Wis., manufacturer with $820 million in sales, is using about 30% more of the credit line provided by J.P. Morgan this year. The money is funding the purchase of several international distributors, product development and increased inventories, said Trek CEO John Burke.
The brightest spot in business lending is commercial and industrial loans. After bottoming out at $1.21 trillion in the third quarter of 2010, according to the Federal Reserve, loan balances increased to $1.25 trillion in early April, up 1.54% from a year ago.
At J.P. Morgan, average commercial and industrial loans outstanding rose 13% in the first quarter from the year-earlier period. In January, the bank began offering existing clients longer terms and lower rates for leases and financing of trucks, equipment and other assets.
Competition remains keenest for companies with the strongest balance sheets, said Cort O'Haver, executive vice president for commercial banking at Umpqua Holdings Corp. Banks are "crying for commercial and industrial loans."
Write to Ruth Simon at email@example.com