When then-President George W. Bush signed the Troubled Asset Relief Program (TARP) last fall, he knew that if he wanted to turn around the economy he would have to find a way for businesses to re-establish credit. One of the main objectives of TARP was to encourage banks across the country to increase the amount of money they lent to businesses.
One of the first symptoms that the economy was sick was a lack of incentives for banks to lend money. On Oct. 29, 2008 Wells Fargo received $25 billion in TARP money, one of several banks across the country that received funds to help strengthen the banking industry.
“Chief Executive Officer John Stump reported that we’ve lent $225 billion to U.S. taxpayers since last October, which is nine times the amount we received from the TARP program,” says Stephanie Arceneaux, business relationship manager, AVP, of Wells Fargo Bank. “We also reported a profit for first quarter 2009.”
Smart Business asked Arceneaux about the state of commercial lending in the United States.
How have commercial loans overall been affected by the economy?
Commercial loans have definitely been impacted by the economy. Sequentially our total commercial and commercial real estate loans have been down about 3 percent and commercial lender requests have slowed down through the first three-month period of 2009 as we are starting to see borrowers reduce their receivable and inventory levels in order to conserve cash. They’re paying them down a little bit.
Now, while our commercial lending is down, it’s important to note that lending is up significantly in other areas, such as mortgage origination. Further, sales of Wells Fargo Business Services® packages (business checking accounts and at least three other business products) is up 37 percent from the prior year.
Are companies still taking out loans?
Companies are definitely still taking
out loans. However, many commercial borrowers are de-leveraging their businesses, meaning they are voluntarily reducing their debt levels. As consumer spending has substantially decreased, companies must adjust their debt balances to fit with their current cash flow and revenue. This is a prudent posture but Wells Fargo is still making loans to creditworthy borrowers.
Are companies still buying equipment new or are they trying to make what they have last longer?
Historically, the lion’s share of equipment lending that I’ve done has been to purchase software or other IT equipment. In these economically challenging times, I’ve seen companies curtail their IT spending. Equipment lending is cyclical, and the economy is at a low point in the cycle. As the economy improves, I expect to see equipment lending rebound as there will undoubtedly be some pent-up demand for many types of equipment.
Does it look like the economy has turned the corner at all?
It does appear the economy has started to improve somewhat. More specifically, to cite one metric, after a 74 percent decline from the peak in July 2005, new U.S. home sales appear to be bottoming out. The pace of home sales, which hit a record low in January, jumped in February and was flat in March, the Commerce Department reported last week. Additionally, interbank borrowing rates, such as LIBOR, have declined materially since the onset of the credit crisis. To the contrary, the unemployment rate, which is 8.5 percent nationally and 6.5 percent in Houston, is trending higher and must stabilize in order for consumers to feel confident enough to resume discretionary spending.
What type of lending suffered first when the economy started to show signs of trouble?
The first sign of trouble was on the consumer side with regards to subprime lending. Secondly, consumer lending, credit cards, mortgages and loans. Finally, commercial lending, mainly in commercial real estate. The consumer side was definitely hit first and then the downfall trickled over to the commercial lending side. I would like to think that once the consumers are more comfortable with spending, we will start to see the economy turn around.
Is the lending atmosphere different in Houston than it is in other areas of the country?
I do see that. We’re still going forward on our end. In many other states you see a lot of pull back, but we are still seeing a lot of loan requests in Houston. So I do think that Houston is blessed that our economy is still moving at a pretty good pace. Some people are hurting but not as much as in other cities and other states.
How has commercial construction been affected?
The commercial construction side has definitely slowed down quite a bit. Many financial institutions are definitely underwriting tighter than in the past with regards to the terms and structure of repayment as it relates to down payments, LTV and percentage preleased prior to construction.
STEPHANIE ARCENEAUX is a business relationship manager, AVP, of Wells Fargo Bank. Reach her at (713) 662-1160 or firstname.lastname@example.org.