Banks Looking to Lend Again In Search of Assets, Earnings
By KATE BERRY
Staff Reporter
Commercial banks are finally putting out the welcome mat in an effort to jump-start loan growth as mortgage originations begin to slacken.
A rise in deposits and mortgage-related financing has masked the decline in operating earnings, while commercial and industrial lending at all U.S. banks fell 7.1 percent in 2002 and 6.7 percent in 2001.
Part of the decline was due to tighter lending standards after a slew of business loans went bad.
“Banks tend to make their mistakes at the top of the cycle,” said Dan Woerner, chairman and chief executive of Mellon 1st Business Bank in Los Angeles. “Then they overreact and pull back and at the bottom of the cycle they should be making more loans.”
As a result, home loans have accounted for an outsized share of loan growth at U.S. banks: 72 percent of growth in the second quarter, according to the Federal Deposit Insurance Corp.
With the refinance boom trailing off, banks are bracing for a huge drop in mortgage lending. To replace that growth, they’re returning to commercial lending.
“There’s a sense of desperation out there,” said Scott Connella, a senior vice president with Union Bank of California. “Banks are under pressure to grow their assets or loans right now and we’re seeing it in two different areas: pricing and loan structure.”
Most bankers admit the competition for deals has become more aggressive of late, with loans being issued without requiring guarantees, at longer terms and with higher amounts of money advanced.
“If bankers get desperate and aren’t growing, they do more marginal deals because there’s no other way to grow if people are not utilizing their lines of credit,” said Donald Johnson, president of Los Angeles-based American Business Bank.
One problem is a lack of demand. With sales levels stagnant at many companies, mergers and acquisitions activity has remained low and capital expenditures are only beginning to show signs of life.
Other complications include rising deposits, which need to be put to work as loans, competition from non-banks and finance companies, and inventories being paid off and not replaced, leading to “portfolio run-off.”
“The pricing pressure is intense and even irrational at times,” said D. Linn Wiley, president and chief executive of Citizens Business Bank in Ontario, which has seen a 10 percent increase in lending, primarily due to manufacturing growth in the Inland Empire.
Customers have noticed the adjustments, as banks to mimic the more aggressive tactics of others in the market. “You’ll see good companies be the subject of solicitations by a number of banks,” said Noel Ryan, senior vice president at investment bank Houlihan Lokey Howard & Zukin in Century City.
Fear of losing existing customers is particularly acute at companies referred to as “bank orphans.” A small bank may have originated the loan, only to be bought by a larger bank that sheds the officers with relationships to a client.
That category includes Imperial Bancorp, an aggressive lender to small businesses and the entertainment industry, that was bought in 2000 by Comerica Inc., as well as Home Savings of America and American Savings Bank, both acquired in 1998 by Seattle-based thrift Washington Mutual Inc.
“Now, the clients find themselves with bank officers who never booked the loan,” said Nehama Jacobs, treasurer of the Los Angeles chapter of the Association for Corporate Growth. “Banks are losing portfolio to people who will come in and take it, so they’re competing with each other to get the cream.”
