Understanding credit markets with Fifth Third Bank Featured

7:00pm EDT December 26, 2008

Perhaps the only thing tougher than

understanding the local weather pattern is understanding today’s credit markets. Talk of “frozen” credit is common

this winter.

“I constantly hear questions from my customers about whether banks are still lending money,” says John Covington, vice president with Fifth Third Bank in Cincinnati.

“We’re definitely still doing deals. The idea

that credit is not available is simply untrue.”

That does not mean, however, that banks

are not exercising strict discipline in evaluating loan requests.

Smart Business asked Covington to sort

myth from reality.

So, capital is available?

Capital is available. There is always

money for the right purposes. Today, however, capital is extremely valuable. Most

banks are increasingly sensitive about

where they allocate their resources. We

have chosen to be careful about some

industries, but we have money for best-in-class firms. Our capital is going to go to people with their finger on the pulse of their

business. Remember, we’re making a bet

on you, too. But we want to lend; I still have

a loan growth goal to reach in 2009. So, yes,

there is capital.

Will federal bailouts help local businesses

get money?

The short answer is ‘yes.’ First, if your

bank applied, and was approved, to receive

federal TARP (Troubled Asset Relief

Program) money, that should be interpreted as a positive event. In my opinion, those

banks that got federal help were given a

resounding vote of confidence by the Fed.

Secondly, this money will help banks

shore up balance sheets weakened by

falling market values on investments and

troubled loan portfolios. This means there

is capital to lend.

What about loans for capital projects or startups?

Many small business owners are worried

about a capital shortage.

Capital projects, lines of credit, equipment loans and similar requests are all part

of the same capital bucket. They will be

evaluated to ensure the purpose of the

request and the ultimate repayment

sources make sense. However, it’s a tough

time to buy or start a business. In addition

to the traditional repayment sources, be

prepared to contribute personal equity. This

sends the right message to the bank that

you are as committed to the deal as it is and

that you are willing to stand behind your

business plan with your own money.

If you have an unused line of credit, we’ll

be asking if it is truly necessary. That said,

there is no reason to feel you have to renew

your line early or increase it just so it’s

there. We’ll be asking the same questions

we always do, whether it is for a renewal or

an increase. We’ll look at who is running

the company, whether the repayment plan

is reasonable, and how the business sector

is doing.

Should I expect higher loan costs?

Banks today will pay more attention to

getting the right return for their risk.

Capital is expensive. Longer-term fixed rates will remain more expensive than 180-or 360-day revolving rates. And, we all have

to answer to the federal government.

No bank wants to lose market share, so

we are sensitive to what other banks are

doing. But the days of freewheeling, under-prime loans (not to be confused with the

sub-prime mortgages) are over. All banks

today appreciate the need to allocate capital effectively and to be rewarded for their

risk. No one ever wants to lose a deal on

rate, however, I have a responsibility to my

shareholders to obtain the proper yield

on a transaction or we will pass on the


Fees are another area not always handled

uniformly in the past. Today, we are examining fees, too. For example, if there are

violations of the financial covenants, triggering an event of default under the loan

documents, we expect to be compensated

to restate these measures.

Is there any good news?

It seems odd to say, but trying times like

this are inevitable, although not normally

to this degree. Nonetheless, they force

managers to ask the hard questions about

unprofitable lines or examine all expense

items. Look at places to trim back — take

this time to make your business more efficient. I assure you, banks notice when

management teams are quick to respond

and not afraid to make the tough decisions.

Be prepared to thoroughly discuss your

financial information. Don’t be surprised if

your banker wants to dig deeper into your

statements or request additional information. In this way, you will truly understand

your business. However, if you have good

financial practices in place, there is less

need to worry.

JOHN COVINGTON is a vice president in the business banking group with Fifth Third Bank in Cincinnati. Reach him at