September 2013

Reversal in Sentiment — Phoenix Management Q2 Survey Reveals Waning Lender Optimism

The results of Phoenix Management’s Q1/13 “Lending Climate in America” survey showed improvement in all metrics. However, lenders’ optimism waned in Q2, as the survey indicated substantial moderation in expectations for commercial lending relative to the previous quarter.

Michael E. Jacoby Senior Managing Director  Phoenix Management Services

Michael E. Jacoby
Senior Managing Director
Phoenix Management Services

Colin J. Gleason Senior Analyst Phoenix Management Services

Colin J. Gleason
Senior Analyst
Phoenix Management Services

Each quarter Phoenix Management distributes its proprietary “Lending Climate in America” survey to more than 5,000 lenders nationwide. In the Q1/13 survey, we saw significant improvement in nearly all of our lending survey metrics, including improving economic trends, improving commercial lending expectations and accelerating customer growth plans. The lenders were more optimistic about the economic landscape after the outcome of Presidential election, resolution of the fiscal cliff and continued improvement in the stock market. However, the optimism from the first quarter seems to have quickly subsided. The Q2/13 survey showed a fairly substantial reversal in sentiment towards commercial lending and the U.S. economic outlook.

A key issue our lending survey focused on was the future of the housing market. Reponses were mixed on whether the recent uptick in housing was sustainable or not. Nearly half of the lenders believed the housing market will continue to improve and be a significant driver to an economic recovery. However, about one-third of the lenders were skeptical about the prospects for continued improvement in the housing market. In addition to the housing market, lenders believed the U.S. budget deficit poses a large risk to the economic recovery. Additionally, the majority of lenders supported the concept of sequestration but not the manner in which it was implemented.

The most recent survey did have a few bright spots that stood in contrast to some of the pessimistic sentiments on commercial lending, which are outlined in the following sections. A higher percentage of lenders, compared to the Q1/13 survey, believed their institutions are going to relax lending standards. Furthermore, this quarter’s survey showed an improving trend toward higher leverage multiples. This would seem to indicate that it should remain a borrower’s market for the balance of 2013.

Trepidation in Commercial Lending Expectations

One of the questions posed to survey respondents is whether they believe commercial lending will be up, down or remain at the same level over the next six months. The question drilled down further to specific lending sectors, which included small business, middle market, large corporate and international lending. The trend across all lending sectors was a substantial moderation in expectations for commercial lending relative to the first quarter. In the Q1/13 survey, lenders forecasted a sharp increase in commercial lending expectations once the hubbub of the sequestration and fiscal cliff passed. At Phoenix, we use a metric to measure lender sentiment, called the Diffusion Index, which is the percentage of positive expectations less the percentage of negative expectations. The Diffusion Index across all lending sectors increased 41 percentage points in Q1/13 versus the prior quarter. In Q2/13, the lenders responded with more trepidation. The Diffusion Index across all lending sectors decreased 20 percentage points to 10%, a substantial decrease, however still in positive territory.

Breaking down the responses by lending sector indicates lenders are not optimistic about their institution’s opportunities for international lending. The International Lending Diffusion Index reading of -13% for Q2/13 was a seven percentage point decrease relative to the prior quarter. On the Domestic Lending side, lenders are expecting a dramatic pullback from their lofty expectations in Q1/13. In Q2/13, the Diffusion Index for Domestic Lending decreased 24 percentage points for a reading of 18%. Survey respondents’ expectations within domestic lending were fairly consistent across small business, middle market and large corporate. While the data doesn’t show lenders turning completely pessimistic on commercial lending, it stands in stark contrast to the optimism felt during Q1/13.

Lenders Expect Spreads to Continue to Fall

The survey asked lenders whether their financial institutions plan to reduce, maintain or increase interest rate spreads and fee structures on similar credit quality loans. The question was broken down further for lenders to specify their expectations based on the size of the loan (greater than $25 million, $15 million-$20 million, $5 million-$15 million and under $5 million).

Across all loan sizes, lenders are increasingly expecting to reduce loan spreads relative to prior quarters. The reading bottomed in Q4/12 when only 11% of lenders believed they would reduce interest rate spreads. However, since then, the percentage of lenders expecting to reduce interest rate spreads has increased 20 percentage points, to 31% in Q2/13. This finding is consistent with commercial banks reporting a decrease in net interest margin in recent quarters.
Looking at the responses based on loan size, the data tells an interesting story as well. For loans greater than $25 million, lenders responded they are almost two times more likely to reduce interest rate spreads than on loans under $5 million (40% versus 22%, respectively). For loans made between $5 million-$15 million and $15 million-$20 million, 29% of the lenders expected to reduce interest rate spreads for both categories. It is clear that institutions looking for large funded assets are prepared to take a lower interest rate spread.

Long Term Economy GPA Falls Below Passing Level

For each survey, we calculate a weighted average response to the question, “How do you expect the United States economy to perform beyond the next six months on a scale of A through F?” The economic grade point average (GPA) in our Q2/13 survey fell nearly 17 basis points to 1.98 compared to the prior quarter. These results showcase renewed concern about macroeconomic performance in the long term. The results are even more alarming when compared to historical surveys. This is the first long-term economic grade point average below 2.0 since Q1/09. In the Q2/13 survey, there was an 11 percentage point increase in the number of respondents that believe the economy will perform at a “D” level. Conversely, there was a ten percentage point drop in respondents that believe the economy will perform at a “B” level. This pessimistic shift is what caused the grade point average to fall to recent lows. Interestingly and unexplainably, lenders’ long-term pessimism seems to contradict their views’ on a reduction in unemployment, loan losses and bankruptcies.

Healthcare Tops the Most Volatile Industries

Respondents were asked to select three industries they believe will experience the most volatility (e.g., Chapter 11 filings, mergers and acquisitions, declining profits, etc.) over the next six months. The top three most volatile industries selected by lenders in the Q2/13 survey were the healthcare industry, retail trade industry and construction industry. This is the first survey in which the healthcare industry has been viewed as the most volatile industry, garnering 59% of the responses. Clearly, the pending implementation of the Affordable Care Act legislation has catapulted healthcare to the top of this list. The second most volatile industry, as viewed by the respondents, is the retail trade industry at 51%. For the past four quarters, the retail trade industry has been on the survey’s top three most volatile industries. However, according to the Gallup Weekly U.S. Consumer Spending poll, weekly consumer spending has steadily increased throughout this time period. As consumer spending accounts for 66% of GDP, it will be interesting to keep an eye on the role the consumer plays in the economic recovery going forward especially in light of the lenders’ skepticism. The third most volatile industry, as chosen by the survey respondents, was the construction industry at 32%. The construction industry consistently has been chosen by survey respondents as one of the most volatile industries throughout the economic downturn. In fact, the Q1/13 survey was the first time the construction industry was not chosen as one of the top three most volatile industries in the past four years. It appears lenders are still not fully confident the construction industry has rebounded from the depths of the housing market collapse.


Results of our Q2/13 survey indicate that lenders are less optimistic about the economy and commercial lending. While commercial lending expectations decreased, the respondents did expect a continued compression of interest rate spreads and a continued increase in leverage multiples both of which bode well for borrowers. However, we are eager to get the results of the Q3/13 survey, as rates have increased subsequent to our Q2/13 survey as the Federal Reserve has discussed tapering bond purchases.

It was also noteworthy to see the drop in lenders’ long-term expectations for the U.S. economy. The last time we had a long-term economic GPA reading below the 2.0 level was Q1/09. The U.S. economy has come a long way since the height of the financial crisis in 2009, but the concern expressed by lenders is troubling.
Lastly, lenders believe the healthcare industry will see volatility in the near future most likely reflecting concerns with the issues, delays and uncertainty regarding the implementation of the Affordable Care Act. We will continue to monitor how lenders’ view the healthcare industry going forward and the impact on healthcare lending.

Michael E. Jacoby is a senior managing director and shareholder at Phoenix Management Services. He has served in advisory capacities as well as interim management positions for more than 200 Phoenix clients in a wide variety of industries since joining Phoenix in 1992. He can be reached at mjacoby [at] phoenixmanagement [dot] com.

Colin Gleason is a senior analyst with Phoenix Management Services and can be reached at cgleason [at] phoenixmanagement [dot] com.

The Phoenix Management “Lending Climate in America” Survey is conducted quarterly to gauge shifts in lenders’ attitudes toward the economy. To see the full survey results, visit