Collapsed & infirm lending? Not so, say several C&I lenders

RMA Journal, The, May, 2004 by Beverly J. Foster

These comments might lend themselves to contemplation. However, if commercial and industrial lending were given voice, it might prefer to quote Mark Twain: "Reports of my death are greatly exaggerated." Ever since the economy took its nosedive into uncertainty, we've been hearing how banks have gravitated toward the economy's one enduring healthy limb--the consumer. So, obviously, all banks are scuttling their C&I portfolios and moving en masse into reliable retail, right? The voices of C&I lending heard in this article disagree. Five bankers replied to nine questions about the C&I portfolio to give a clearer picture, although opinions differ as to whether C&I is chronically impaired or up and training for the next marathon.

Describe your current C&I portfolio. What changes would you make?

Colonial BancGroup defines C&I lending as unsecured business-purpose loans or any business-purpose loans not secured by real estate. "We divide the market between small business (less than $500,000 in credit exposure) and all other concerns," says SVP James L. Hogan. AmSouth's small-business portfolio includes businesses with sales up to $5 million, and its middle-market portfolio includes larger businesses. The bank has relatively few opportunities to be involved with large corporate clients.

Banknorth (BNK) splits its C&I portfolio by SIC codes. "We provide oversight to the C&I portfolio by major categories," says Ed Schreiber, naming agriculture/mining, construction, manufacturing, transportation/public utilities, wholesale, retail, health care, and services as industry sectors. "We then subdivide these sectors into more manageable categories. BNK is attempting to keep a balanced C&I portfolio. Given current industry trends, we are not looking for additional C&I credits in certain segments of manufacturing."

RBC Centura Banks splits its C&I portfolio (exposure over $1 million that does not rely on real-estate-related cash flow or collateral for repayment) into key sectors, such as knowledge-based industries (KBI), public sector, service companies, manufacturing, energy, telecom, and others. "We rate each industry, much as we rate individual borrowers," says Andrea Bolger, "and based on those ratings, we set exposure limits for each key industry sector. Right now, we want to see more exposure in KBI, service industries, manufacturing, distribution companies, and companies operating in industries that are not too cyclical--nothing terribly surprising. Our limit-management approach has prevented us from needing to pare down anything in our current C&I portfolio."

Cole Taylor Bank competes mainly in the lower end of the middle market--defined as companies with sales up to $50 million in the greater Chicago area. "We are something of a 'throwback' in commercial banking in the sense that we take deposits and make loans," says Mark Garrigus. Cole Taylor splits its C&I portfolio according to line of business--commercial real estate, middle market ($10 to $50 million), and business banking (companies with revenues of less than $10 million), with well over half its exposure secured by real estate.

How do you see the players changing?

Hogan says, "Advances in technology and communication will continue to make nonbank capital markets' products and services available to an ever-growing number of businesses. Traditional C&I lending will become more and more focused on the smaller end of the market." AmSouth's Michael J. Willoughby says, however, "Attempts by out-of-market lenders to enter the middle market tend to be unsuccessful because of the importance of the relationship to these clients. I believe this will continue in the foreseeable future." Hogan feels commercial banks and thrifts will be forced to compete more aggressively for the relationship-oriented middle market and small businesses by providing better products, services, and delivery channels. "I believe investment banks, institutional lenders, and capital market service providers will continue to penetrate deeper and deeper into the commercial universe," he says.

"Banks must be big enough to meet the credit needs of small middle-market customers and to have reasonable product and technology, yet small enough to deliver personalized attention and service that is more than lip service," says Garrigus. "As a result of consolidation, there are fewer competitors at this end. As institutions grow larger, they really lose their ability to serve this market effectively."

Is there a swing away from C&I at your institution? If so, what are you swinging toward?

"The economic recovery will have a lot to do with C&I's vitality," says Ed Schreiber. "At this point in the cycle, C&I lending is flat but has shown some signs of recovery. On average, only 41% of Banknorth's lines of credit are being utilized." On the other hand ...

"There definitely is not a swing away from C&I; to the contrary, it is a key area of focus and part of RBC Centura's diversification strategy," says Bolger.

"Over the next six months, AmSouth wants to grow its C&I book in a balanced way," agrees Willoughby. "To help do this, we have developed an industry rating system so that we can focus our efforts both on improving industry segments and adding underrepresented industries to the portfolio. Managing loss volatility while growing revenues are the principal focus for our C&I activities. We believe that this combination produces the best return for shareholders and will have a positive influence on stock prices."