This episode of the Purposeful Banker features Gita Thollesson, PrecisionLender's SVP of Market Insights. She gives a sneak peek at a few of the findings she'll share in her upcoming State of Commercial Banking webinar.
The State of Commercial Banking: 2020 Market Analysis (Webinar)
The State of Commercial Banking: Jan. 2019 Market Analysis (Report)
Tightening Credit or Loosening Structure? A Bit of Both (Blog)
Hi, and welcome to the Purposeful Banker, the podcast brought to you by Precision Lender, where we discuss the big topics on the minds of today's best bankers. I'm Maria Abbe, Senior Communications Manager here at Precision Lender. Today's show features Gita Tholleson, Precision Lender's SVP of Market Insights. And Jim Young, our Director of Content. Gita and Jim will be discussing Gita's upcoming webinar, entitled State of Commercial Banking: 2020 Market Analysis.
They'll be touching on some of the topics Gita will be covering in the webinar, and she'll provide a sneak peek or two into some of her findings.
We'll have a registration link for the webinar in the show notes, and you can also sign up for it by going to precisionlender.com
and clicking on the banner ad at the very top of the screen. But first, enjoy this preview podcast. We'll have links in the episode notes to relevant articles and information. Now, on to the show. Enjoy.
Jim Young: Gita, welcome back to the podcast.
Gita Tholleson: Thank you Jim, good to be here.
So, as Ashley mentioned in the promo to start off this episode, your webinar, the State of Commercial Banking, 2020 Market Analysis
is coming up in a little over a week. Can you explain to our new listeners sort of what this report is, and then what the data is that you're analyzing?
Gita Tholleson: Sure. So, it's a retrospective on 2019, as well as an outlook for 2020 on the commercial banking market. And it includes loan volume, credit risk, pricing, structure, cross sales, all the above. So, it's a combination of a few different sources, so for context, we did take a look at some of the Fed sources for aggregate volume stats, but it's primarily based on our proprietary database which is account level information that we collect directly from the portfolios of banks that we work with. We are currently pricing at a run rate of about $2.8 trillion per year. So, it's a fairly robust data set from over 200 commercial banks that comprise most of the analysis that we look at.
Jim Young: Okay, great. So, some of this report is simply revisiting benchmarks that you studied last January but you've also added in some new analysis, as well. What are some of the new things that you are looking at and what was your thinking in deciding to look at them?
Gita Tholleson: Well, it assures that there were probably three new areas, three main areas where we added some new content and that could probably be summarized in terms of credit risk, volume and structure. On the credit risk side, that's a really important topic now given where we are in the credit cycle. Certainly, there has been a lot of discussion in the banking market around when the next downturn will hit and whether or not there are signs of stress in the market right now. So, we want to take a look at risk and measure it in terms of sort of where things stand in the current banking environment and we did that using both public hall report filings on charge-offs and delinquencies but then also using a proprietary data where we could spot those trends a little more quickly.
So, certainly, if you look at charge-offs, those are problems which have been brewing for a while, right? So, even delinquencies where you're looking at more than 30 days past due, it's a somewhat earlier indicator but it is still a bit late. Using our own data, which is at the account level, we can even identify credit downgrades on performing loans. So, it's really a much earlier indication of credit stress which is what we take a look at.
That was on the risk side. Then, in terms of volume, that's certainly been the hot topic. Everyone's struggling with achieving their budgets and we thought instead of just reporting on aggregate volume stats, we thought we would take a look at where the volume is coming from. So, we did a deeper dive, including things like measuring how much volume comes from renewals versus origination's and within the origination arena, how much of that volume stems from existing clients versus new-to-bank relationships. So, really trying to dive in a little bit deeper.
Then the third new area is structure. So, there has certainly been a lot of talk in the market around structural concessions. People have been telling us for ages that in competitive situations, it's not just about price but they're also seeing other banks give up on structure and we wanted to measure that. At the same time, we wanted to test what bankers are saying in the Fed survey around tightening and essentially take them to task and see if that is just aspirational or if it really is happening.
Jim Young: Okay. Before we go kind of further into 2020, I want to go back to something that you looked at when you did this analysis in January 2019. Actually a little further than that, because what I remember is that looking at that report that accompanied your webinar, Q4 2018 was pretty strong from a commercial lending perspective.
Looking back on that now, without giving away too much about what you found in 2019, would you say that was more of an anomaly than a trend?
Gita Tholleson: Yes, it was a bit of an anomaly and the pick-up that we saw in the fourth quarter of 18 was somewhat opportunistic. So, going into the fourth quarter, the volume numbers had been really weak for most of the year. Bankers had been telling us that it was just a really tough environment and there were a couple different reasons for the weakness. First, remember that the tax cuts kicked in, in early 18. Corporations were flush with cash and had less of a need for financing and people were still pretty cautious about investing.
It was more opportunistic. We saw more refinancing's and capital expansions. Probably the biggest driver of the weak results in 18, was disintermediation and that was up and down the market. At the smaller end we saw more thin tax encroaching on the banks base. In the large corporate market, certainly there are other sources of financing in terms of the capital market alternatives. In the middle market, we saw the emergence of the unregulated non-bank financial institutions. They really came in strong in 18. Those are companies that can write some pretty big checks. They were also squeezing out commercial banks.
What little loan demand did exist, was sometimes bypassing the commercial banking market altogether and going to these alternative lenders. That was going into the fourth quarter of 18 and, to be honest, when the fourth quarter numbers came out, I was a bit surprised that they were as strong as they were because all signs point to weakness and it was unusual to hear that the mood had changed and there were a lot of executives that were talking about how 19 was going to be fantastic. I thought the same factors that were in play throughout most of 18 are still out there now.
I was perhaps a little bit more pessimistic about the outlook and data did, sort of, bear that out in 2019.
Jim Young: Refresh my memory, what was the reason for that sudden uptick though. You mentioned the tax break earlier in the year. Was there something that caused that uptick?
Gita Tholleson: Yeah. It was a lot of opportunistic financing. Rates, you'll remember, were increasing throughout much of 18. People were looking to lock in financing. We were seeing more fixed-rate lending going on, people looking to, sort of, lock in rates before rates rose even further, some refinancing, even in the syndicated loan market of earlier debt.
It wasn't a lot of new money as much as refinancing existing debt, for the most part.
Jim Young: Okay. So, we've heard a lot of talk, and quite frankly, we've done a lot of talking ourselves about banks preparation for a potential economic downturn. Again, without getting too deep into the specifics that you'll share in the webinar, did you see evidence of that preparation in the way that banks and bankers were acting in 2019?
Gita Tholleson: We did see evidence of that and that was mostly early in the year. There really was a lot of talk of a pending downturn, probably back in the Spring when the yield curve first inverted and up until that point, remember that the Fed had been raising rates because the economy was so strong. Then, all of a sudden when the yield curve flattened and then briefly inverted, economists started predicting a downturn and the Fed started cutting rates and people got really nervous.
There was just so much concern out there and early in the year with that being in the near term horizon, in a lot of people's views, we actually started to see a widening of spreads. Then, as the year progressed and the economic indicators still remained fairly robust, people started to relax and say, "yeah there will be a downturn but it's not going to be right now."
In fact, in one recent survey that I saw, bankers are now predicting that the next recession will probably hit in 2021. So, by the end of the year, people weren't talking so much about a pending recession, more talking about, "how are we going to make budget this year" and "things are so competitive, how are we going to win the limited assets that are still out there?"
Jim Young: Got it. What's something you found in the data that perhaps caused you to raise your eyebrows and say "I wasn't expecting that," or was there anything in the data that gave you that reaction?
Gita Tholleson: Yeah, there was. There were some things that we expected to find and the data just confirmed the specifics. One example is, we expected that with rates declining we would see that more borrowers would want to lock in fixed-rates and we were able to measure exactly how much of a shift there was. It was interesting, we saw the incidents of adjustable rate loans rise for the largest borrowers. It's a segment of the market which typically is almost entirely floating rate. We actually saw some pick up there.
It was an ability to measure the specifics more than being surprised directionally at the findings but there were some other things that surprised me and probably the biggest of those was the bifurcation in the market. When you talk to bankers, and we speak to a lot of bank executives, they're always talking about how competitive things are and how banks are giving up on both price and structure. Then, you read a lot about the syndicated loan market, talking about covenant-lite deals becoming the standard and leverage ratios increasing and the market just being so competitive.
I approached this analysis thinking that there was a real disconnect between the credit side and the line side of banks. Credit folks in the Fed survey are saying that they're going to tighten up and the line exec's that we speak to are saying that they just can't. There's pressure on them, there's pressure on revenue, volume is down with rates declining. That's putting additional pressure on them.
Probably what surprised me the most was seeing in the data that the competitive posturing out there, really is limited to the larger, more impactful deals and that, if anything, banks are tightening up on the smaller credits. Loan-to-value is being reduced and terms are shortening, but really just for those smaller, higher risk deals.
It really is a bifurcation in the market
and we are seeing it, not just in terms of structure, but also in terms of pricing. We are seeing steepening of the risk return curve, a steepening of the size return. So, I have to say it was pleasant surprise but it was a surprise, none the less. Just to see that the market today is more disciplined and is being more strategic about where to sharpen their pencils and where to pull back the reins. So, definitely a surprise.
Jim Young: Finally, and you touched on this with your commentary about the bifurcation of the market, and to me, we talk about that age old tug-of-war between credit and sales that's almost like divvying up of turf, right? Like on those smaller deals credit kind of gets the upper hand and on the bigger deals, sales is sort of the one that's calling the shots.
Do you anticipate that? I know this is sort of a crystal ball sort of question, but looking ahead to 2020, do you think one side gets the upper hand in this year?
Gita Tholleson: It's hard to say, but certainly at most banks, credit calls the shots in terms of risk appetite and evening structuring. You can certainly get exceptions but credit sets the standards and the sales side has to abide by that but, at most banks, not at all banks but most, I would have to say, it's the sales side that calls the shots around pricing.
They can sort of do whatever they want and if you can call that winning, if you negotiate a deal with razor thin pricing that's unprofitable, maybe they have won. At the end of the day, it really is a balance and it comes down to where you are going to pick your battles. I think, in a sense, both sides have won, because the sales side, although they are being competitive, they're doing it for the better quality clients. They're doing it for larger, lower risk borrowers who really can be more impactful to the bottom line.
They're not just indiscriminately going out there, giving up structure and slashing pricing, they're being smart about it. So, if they can achieve their goals and still give the credit side what they need to sleep at night, I think everyone comes out ahead.
Jim Young: Well, thanks, Gita. I know I'm not alone when I say I'm really looking forward to hearing more about what you have to say about 2019 and ahead at 2020, in your upcoming webinar.
That'll do it for this weeks show. Thanks so much for listening. Now, for a few friendly reminders. If you want to listen to more podcasts or check out more of our content, you can visit our resource page at precisionlender.com
or you can just head over to our homepage to learn more about the company behind this content.
Finally, if you like what you've been hearing, make sure to subscribe to the feed in iTunes, Google Play or Stitcher. We would love to get ratings and feedback on any of those platforms. Until next time, this is Maria Abbe for Jim Young and Gita Tholleson and you've been listening to The Purposeful Banker.
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