Bankers Report Rise in Demand For Loans From Business Clients

By KATE BERRY

Staff Reporter

Local bankers are reporting evidence of a robust increase in commercial lending over the past few months, a sign that business borrowers may be picking up the baton from the homeowners who have kept the economy afloat with cash-out refinancings over the past several years.

“We’re seeing maybe a 40 percent increase in deal flow and loan requests,” said Marty Newton, executive vice president and regional manager of commercial banking at Wells Fargo & Co. in Los Angeles.

In the past six months, Newton estimates, Wells Fargo’s total loan volume in Los Angeles has jumped by $100 million, to $300 million, compared with the like period a year earlier. Much of the activity is taking place among service-sector businesses, manufacturers and distributors, he said.

That view was repeated by bankers throughout the region, with particular strength among those lending to customers involved in the booming overseas trade with Asia.

Center Bank, which is the fourth-largest Korean-American bank in Los Angeles, reported an 11 percent jump in commercial lending activity during the first quarter, to $796 million.

“That’s very strong in just three months and it’s pacing even faster in the second quarter,” said James Ryu, senior vice president at the Center Financial Corp. unit. “We’re seeing some robust growth and it almost shows a different picture of the Korean and Chinese communities growing, whereas mainstream banks are showing just modest growth.”

Comprehensive data on regional commercial lending is hard to come by, because most of the larger banks do not break down their publicly disclosed data on commercial lending geographically. The activity that is disclosed usually takes some time to be booked on the banks’ balance sheets.

Nationally, bank lending activity increased in 10 of the 12 Fed districts, according to the Federal Reserve Beige Book report issued June 16. The report covers activity prior to June 7. The Fed report cited particularly strong commercial loan demand in the 12th District, which includes California and eight other Western states.

“Commercial lending rose noticeably in several areas, and respondents noted healthy or improved credit quality,” said the report on the 12th District, which is based in San Francisco.

Higher profits

The anecdotal uptick in commercial activity bodes well for the local economy, providing evidence of higher investment activity on the part of business borrowers at a time when consumers have dramatically cut back on their refinancing activity.

“It is on the rise because corporate profits are up 20 percent and cash flow follows that,” said Herrick, an economist at Private Bank of the Peninsula in Palo Alto. He said companies typically wait from six to nine months between reporting strong profits and choosing to increase borrowings.

“I think any estimates that people make in the final quarter of this year, and in L.A. in particular because it has performed so well in California, will probably be too low,” he said.

A lack of business investment was a major factor in the recession of 2001 and the failure of the economy to bounce back in a robust way after it ended. Businesses had dug themselves a huge debt hole by borrowing to invest in faulty growth concepts that didn’t pan out. They were left with a debt hangover that required severe cost cutbacks and time to work itself out of the system.

Most severely affected was the technology sector, especially telecommunications, which got caught up in one of the worst cycles of overinvestment.

Though the economy has now regained some of its vitality, one imponderable could be a drop in U.S. durable goods orders reported last week for the month of May, the second straight month of falling orders. The data suggest that on a nationwide basis, corporate spending that had been on the rise earlier this year may again be pulling back.

Orders for durable goods, which include cars, computers and equipment that last at least three years, fell 1.6 percent in May to $189.1 billion, after falling 2.6 percent in April, according to a report from the Commerce Department.

Economists had been looking for a 1.4 percent gain.

Playing into the drop were expectations that the Federal Reserve will raise interest rates at a rate faster than was expected a month or two ago, in an attempt to slow down the economy. (The Fed is poised to raise short term interest rates by an expected & #378; of 1 percentage point this week.) Also, rising gasoline prices had an impact on sales of automobiles.

Meanwhile, durable orders dipped just 0.7 percent when transportation-related items such as automobiles are factored out.

“It certainly was a surprise to hear the durable goods figure was negative,” said Ryu. “It’s possible that the gas price situation is having some effect and perhaps some companies may have pulled back on orders because they’re weary of the Iraq situation. But I can’t say that’s having much of an impact on Los Angeles.”

Those crosscurrents are in evidence at New Century Ford, a San Gabriel car dealership that built a 13,600-square-foot showroom in January. It also developed a 26,000-square-foot car repair facility across the street from the new dealership, scheduled to open next month.

George Pau, the dealership’s general manager, said the expansion has dramatically increased business.

“We have a bigger lot and more exposure so we get more business,” he said. “But it has been a little sluggish in the past 30 days because of higher gas prices.”

The pickup in loan activity comes off flat commercial loan volume in 2003. “We’ve just started to really see it,” said Bita Ardalan, market president overseeing commercial banking in Los Angeles for Union Bank of California.

Ardalan said many medium-to-large businesses are showing the biggest pickup in outlays for computers, equipment and general inventory purchases, while companies at the lower-end of the middle market, below $50 million in sales, are lagging slightly behind.

Mark Glasky, executive vice president of commercial banking in Los Angeles for Bank of the West, is seeing a rise in equipment purchases, mergers and acquisition activity and loan volume.

“We’re seeing very strong activity across the board with new loans booked in the past five months up in double-digits and a 25 percent increase in loan commitments since December,” he said. “Last year it was just much more difficult gaining new customers, and loan fundings were pretty much flat.”