Banks reduce spreads to win borrowers
CFOs who haven’t refinanced their company’s bank loan for some time may want to review the terms and ask their bank for concessions. The Federal Reserve quarterly survey of senior loan officers, released on Monday, revealed that many U.S. domestic banks continue to ease underwriting standards for commercial and industrial (C&I) loans, especially for large and medium-sized businesses, in a bid to attract and retain commercial borrowers .
The most prevalent easing trend over the past three months has been spread tightening – the rate a C&I borrower charges on the bank’s cost of funds. But banks have also said they have reduced the cost of lines of credit, lowered the use of interest rate floors and relaxed loan covenants. The reason seems to be that the banks are eager to take out C&I loans.
“All of the domestic respondents who said they relaxed the standards or terms for C&I loans in the past three months cited more aggressive competition from other banks or non-bank lenders as an important reason for doing so,” he said. the Federal Reserve said in its report accompanying the April 2014 survey. “A smaller number of banks also attributed their easing to a more favorable or less uncertain economic outlook and increased tolerance for risk.”
Slightly more banks surveyed also reported higher than lower demand for C&I loans from businesses of all sizes. “To explain the reported increase in loan demand, banks cited a wide range of customer financing needs, particularly those related to inventory, accounts receivable, investments in factories or equipment, and mergers or acquisitions, ”the Federal Reserve said.
Some of the same trends have appeared in commercial real estate loans (CREs). More US domestic banks have also reported easing rather than tightening underwriting of commercial real estate loans, particularly construction and land development loans; loans guaranteed by non-residential non-agricultural structures; and loans guaranteed by multi-family residences. More banks have also reported higher demand for these loans.
The number of US banks that have reduced spreads on CRE loans over the past 12 months has also outnumbered those that have increased spreads. More and more banks have also relaxed their policies regarding the maximum size and maturity of these loans, and also said they have widened the market areas in which they take CRE loans. But according to the survey, few banks have changed their debt service coverage standards, loan-to-value ratios or take-out financing requirements, the Federal Reserve said.
On the consumer side, reports on homebuyer loan demand echoed trends in home sales – banks reporting lower demand for residential mortgages outnumbered those reporting higher demand. . However, banks have reported higher demand for credit card and auto loans on the net. “Several major banks have increased credit limits on consumer credit cards, and banks have said they have eased interest rate spreads on auto and other consumer loans on the net,” said the Fed. Consumer installment loans have also grown in popularity among banks, with several banks saying they are more willing to take them out and none saying they are less willing to take them.
The Federal Reserve’s report is based on responses from 74 domestic banks and 23 U.S. branches and agencies of foreign banks.