Confidence in the asset-based lending market held steady in the third quarter as banks and other lenders kept a close eye on the bigger economic picture, according to data released by the Secured Finance Network.
SFNet surveyed bank and non-bank asset-based lenders on key indicators for its quarterly Asset-Based Lending Index and SFNet Confidence Index.
“Overall sentiment for secured lenders moved laterally compared with last quarter but remains positive,” the report said. “Outlooks differ somewhat between banks and non-bank lenders on some specific issues. Bank lenders report very high expectations for overall business conditions, demand for new business and loan utilization going into Q4, but expectations for portfolio performance dipped notably relative to last quarter.”
Non-bank lenders, meanwhile, have high expectations for loan utilization and demand for new business, but they indicated declining expectations for business conditions in Q4.
“This dip in expectation likely reflects concerns about the impact of the supply chain crisis and inflation on the broader economy,” Richard D. Gumbrecht, CEO of SFNet, said.
Survey Highlights
For banks, asset-based loan commitments (total committed credit lines) were up 2.5% in Q3/21 compared with the previous quarter. Outstandings (total asset-based loans outstanding) increased by 9.8%, though the survey analysis revealed that total outstandings have yet to rebound to pre-pandemic levels.
For non-bank ABLs, commitments inched up just 0.3%, but the change in outstandings was more solid, rising 6.9% from Q2/21. Both measures were up significantly from year-earlier levels, according to the survey analysis, with term loans representing a growing share of loans.
In terms of credit line utilization rates, banks haven’t experienced a rebound from two years ago when rates were in the mid-40s. The Q3/21 utilization rate was 35.4%, up slightly from 33.3% the previous quarter. The rate was higher for non-bank lenders, reaching 50.3% compared with 45.4% in the prior quarter.
“Steady economic growth means modestly higher demand for credit,” the report said.
Portfolio performance was strong among secured lenders, according to SFNet’s Q3/21 Asset-Based Lending Index, likely due to economic growth overall and continued low interest rates, as well as business cash reserves.
“Total criticized or special mention loans have dropped as a share of total outstandings to 6.8% among reporting banks, the lowest share in years,” the report said. “[And] twice as many banks reported decreases to their gross write-offs in this quarter as reported increases.”
However, the industry may face new challenges heading into 2022, with rising inflation and Federal Reserve “tapering” now in process.
“It is not just housing that will be impacted by rising interest rates. Durable manufactured goods, including automobiles, can be expected to suffer setbacks as interest rates increase,” the survey analysis said. “Rising interest rates can also undermine stock market valuations and asset prices more generally.”
Still, the ABL market has demonstrated resiliency in all sorts of economic environments over the years.
“A bit more stress in the financial system is likely as the economic expansion matures, as more businesses look to finance inventory build and as the next phase of capital spending kicks in — all developments that should bring expanding opportunities for the secured lending industry in 2022,” the report said.
