Banks Put Their Liquidity to Work, but Added Competition Puts Pressure on Rates and Elevates Risk

By Shayndi Raice

Carl DelPrete, chief executive of suburban New York supermarket chain Uncle Giuseppe’s Inc., couldn’t be happier with the current lending environment. To fund a recent expansion, he got bids from three banks and calls the terms on the $14 million loan “the best we’re ever going to see in our lifetime.”

The episode reflects a renewed willingness by some banks to lend cheaply and on flexible terms.

But with banks not far removed from persistent criticism that they were slow to make business loans that would kick-start an economic recovery, a new concern is emerging: Is the pendulum swinging too far the other way? Business loans do not always come from the banks, there are other people to go to for funding your business. You can compare offers at smallbusinessloans.co.

The surge in loans to businesses is raising worries that lenders are competing so aggressively that some will pay for their largess down the road. In order to get a business loan anyway, you need a good credit score! You can click here to find out more of this side of business world. Before getting a loan it’s worth checking out reviews of loan companies on somewhere like Loan Review HQ to give you all the information so you make an informed decision.

So-called commercial and industrial loans were up 4.4% in the fourth quarter and 16% for all of 2012, according to data compiled by research firm SNL Financial of Charlottesville, Va.

The push comes at a time when many banks have been flooded with deposits as slow economic growth and low interest rates crimp investment. Domestic deposits since mid-2008 have surged 29% to $9.06 trillion, according to Federal Deposit Insurance Corp. data.

“Banks are loaded with liquidity and starving for growth,” said Paul Miller, an analyst with FBR Capital Markets.

Banks of all sizes are fueling the lending trend. Business loans outstanding at Wells Fargo & Co., the country’s fourth-largest bank, jumped 12% to $187 billion in 2012. The State Bank of Southern Utah, a community lender based in Cedar City, Utah with $715 million in assets, saw a 9% jump for the year to $38 million. The bank is a unit of Southern Utah Bancorp.

Yet the profitability of the loans that banks are making is under pressure.

More than half of banks surveyed in the quarterly Federal Reserve survey of loan officers said that lending spreads—a rough gauge of profit that measures the gap between the rates at which a bank borrows money and lends it out—had narrowed in the past three months. The survey said standards on loans to medium and large firms eased for the fourth quarter in a row. Respondents “cited more-aggressive competition,” the Fed said.

Mr. Miller said lenders are learning they must in many cases “let deals walk” because terms are becoming too risky.

Jeffrey Black, chief financial officer for Verenium Corp., an industrial-enzyme producer based in San Diego, said three banks competed to offer the company a $10 million credit facility. “They all kind of came to the table with a great deal of flexibility on terms, the rate, the covenants,” he said. Ultimately, Verenium chose Comerica Inc. because it had a long-standing relationship with the bank.

But deals like the one for Verenium are squeezing Comerica’s margins, with the bank saying in a recent filing that the shifting market means higher-yielding real-estate loans are being replaced with lower-yielding commercial loans.

The Dallas-based bank’s net interest margin, a measure of lending profitability, fell in the fourth quarter to 2.87% from 3.19% in the year-earlier period. Comerica reported net income of $130 million for the fourth quarter of 2012, up from $96 million in the year earlier period. A spokesman for Comerica declined to comment.

The majority of Wells Fargo’s increase in business lending, said Perry Pelos, head of the San Francisco bank’s commercial-lending unit, came from business owners who delayed buying equipment for years but now are comfortable enough to make that investment and borrow the money to fund it.

The U.S. unemployment rate was 7.9% in January, the government said, down from 8.3% a year earlier and a 2009 peak of 10%.

Stephen Tramp, an executive at Green Bay, Wis.-based Associated Bank, a unit of Associated Banc-Corp., said he has had to pass on deals because competitors were offering terms he thought would put the bank in a “very precarious position.” He pointed to the 10-year, fixed-rate loans on offer at some institutions—a move that raises red flags with him because banks normally offer at most five to seven years.

Plus, this comes at a time when many observers expect rates to rise in coming years.

“When competition for loans increases, that shows itself in thinner pricing and eventually in loan structures that are weaker than what they had been,” said Allen Tischler, senior vice president of Moody Investor’s Service Inc.’s banking team.

Mr. DelPrete, who used his 4.25% five-year loan to move Uncle Giuseppe’s wholesale business from the Bronx to a larger facility on Long Island, chose New York-based Signature Bank because of a prior relationship. He has the option to renew the loan another five years.

Scott Shay, chairman of Signature, said that the bank isn’t relaxing its standards, but added that he has seen a shift in the industry. “I do think some other banks are become more willing to make loans,” he said, adding that they “are having a downward impact on prices.”

With profits under pressure, the frenzy has some bankers pushing back. Ronald Paul, chairman and chief executive of EagleBank, a unit of Eagle Bancorp of Bethesda, Md., said his bank is passing up loans because of the “ridiculously low, low interest rates.” He said he’s told some previous borrowers that he won’t match rates from competitors. “We’re not doing it,” Mr. Paul said. “We’re not chasing those loans.”