Wednesday, November 11, 2009

Corporate lending ready to take off - just need the borrowers

Banks are ready to increase lending to corporations and will attempt to ramp their lending significantly in 2010. Here are the reasons:

1. Since the beginning of the year, bank commercial and industrial loan exposure has dropped by 14%, while real estate loan exposure has decreased by only 2%. To the extent they can, banks will rotate out of real estate loans and into corporate loans.

2. At this stage, real estate linked loans constitute some 32% of the balance sheet, while corporate loans are under 12%.

3. As the chart below shows, commercial and industrial loans as percentage of the total assets have dropped quickly. Bankers have demonstrated to their credit departments that corporate loan exposure can in fact be reduced when need be (large corporate loans can trade fairly actively).

4. The following chart from the Fed shows the end to tightening of lending standards to companies.

5. As capital markets stabilize, the bid-ask spreads become tighter, reducing profitability of market making activities. 2010 budgets will need to shift more into lending.

What is less certain is how much demand will exist for corporate loans. So far the demand for corporate loans has been weak.

The stronger companies have been able to tap the bond markets, avoiding some of the loan covenants. Other firms either have cash or simply have no major expansion plans. Given the level of unemployment, corporations continue to be cautious on expansion plans or capital projects. To the extent possible (with 08 fresh on their minds) firms will avoid increasing their leverage. The one key area where banks will be able to help is in inventory financing as corporations try to rebuild depleted inventories (see chart below).

It's not at all clear however how soon the inventory rebuilding will begin. Corporate lending will be ready for business, but will there be takers?
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