The Q3 2020 Asset-Based Lending Index reflects improving confidence for lenders, fears of a double dip downturn subsiding for now, and exhibits the continuing impact of PPP funds distributed in April.  The Q3 rebound of the U.S. economy lead to a GDP surge of 33%. This growth had a clear impact on lender sentiment which was likely influenced by improvements in portfolio health with non-accruals, special mention, and write- offs reducing quarter over quarter, according to the Secured Finance Network (SFNet).

“While sentiment from both bank and non-bank lenders was more positive from Q2, the overarching theme of Q3 can be told by the continued decline in utilization for bank lenders,” the SFNet data analysis noted. Utilization refers to loans outstanding as a percentage of total commitments.

Bank groups set their lowest utilization level in the five years since these figures were collected by SFNet, with 75% of banks reporting decreases. Non-bank usage reduced slightly over the previous quarter, but are back to levels not seen since the first and second quarter of 2017.

Comparing previous periods against Q3 results of $276.3B in commitments and $91.0B in outstandings, shows that an issue with portfolio returns could be taking root within the banks, which have been impacted by the defensive draws of Q1 being repaid by PPP funds, robust capital markets issuances, and low utilization by the SNC credits.

Richard D. Gumbrecht, the SFNet CEO said, “The utilization data implies supply is generally outpacing loan demand, but Q3 resulted in a surprisingly quick rebound for lenders in both credit quality and confidence following the most volatile quarter since the Great Recession.”  

Compared to the previous quarter, new non-bank commitments were increased by 183% to $352.6 million for the third quarter.

Levels of non-accruing loans for Bank Lenders dropped to $500.7 million, an 18.7% decrease over the last quarter.

SFNet also reported the results of its quarterly “Confidence Index” survey, which solicited responses from senior executives in October, regarding their views on anticipated activity or conditions in the upcoming three-month period.

Confidence indicators improved or remained steady as the economy rebounded during the third quarter. Lenders were much more positive on the economic outlook through year end as the SFNet Confidence Index survey shows material improvements in portfolio performance and general business conditions relative to the prior quarter, with responses hovering around the “Remain the Same” mark, suggesting that the lenders view that the worst is over and some level of stability can be expected.  Both Write-off and non-accrual saw a significant improvement, mainly due to economic improvement and immediate and careful action at the beginning of the pandemic. Credit standards continue to tighten within both small and large banks alike.

As highlighted above, utilization continues its decline and while respondents in Q2 did not expect this to occur in Q3, they have tempered their expectations slightly and expect Q4 to remain the same. New business demand expectations were slightly lower, but zero Bank respondents expect demand to decline. Expectations for hiring declined with all reporting firms indicating that they do not intend to reduce or increase hiring levels.

On the positive side, SFNet noted the following developments during the third quarter:

• Credit quality generally remains strong for the banks with some improvement quarter over quarter. Q3 witnessed a reduction in both non-accruing loans (10 basis point reduction as a percentage of outstanding loans) and criticized/special mention classifications (110 basis point reduction as a percentage of outstanding loans).
• The Confidence Index has improved, reflecting the fact that lenders are optimistic about the future prospects for business conditions and their lending opportunities.