Confidence in the asset-based lending market was positive in the first quarter but banks and other lenders are watchful of an economy that shows a mix of highs and lows, according to data released by the Secured Finance Network.
SFNet surveyed bank and non-bank asset-based lenders (ABLs) on key indicators for its quarterly Asset-Based Lending Index and SFNet Confidence Index.
“Though the U.S. economy is showing deteriorating signals, the asset-based lending industry is healthy and has proven to be resilient to economic challenges so far,” said SFNet CEO Richard D. Gumbrecht.
Indeed, the report said that as other credit markets become less attractive for borrowers, “asset-based lending is becoming more attractive and demand for new lending is solid, demonstrating the continuing value of the industry. An increased reliance on ABL is expected as economic headwinds continue.”
The most positive expectations among lenders were centered on demand for new financing, client utilization and hiring. But they indicated declining expectations in overall business conditions and portfolio performance.
Survey Highlights
For banks, asset-based loan commitments (total committed credit lines) were up 2.3% in Q1 compared to the fourth quarter of 2021. Outstandings (total asset-based loans outstanding) increased by 13.5% based on 38 survey respondents’ data representing $100 billion. This is a return to pre-pandemic levels, according to the survey report.
Non-bank trends were largely parallel, the survey analysis revealed. Commitments inched up 1.6%, but the change in outstandings was up 10.5% from the previous quarter.
In terms of credit-line utilization rates for both bank and non-bank lenders, there was an increase for the fifth consecutive quarter. The Q1 utilization rate for banks was 40.8%, up from 36% last quarter. The rate was higher for non-bank lenders: 57.6%, compared to 50.8% the prior quarter.
“The non-bank utilization rate now exceeds pre-pandemic levels,” the report said, “while the bank utilization rate has yet to reach that benchmark but is moving closer. As other credit markets become less attractive, utilization rates should continue to rise.”
Portfolio performance remained an area of strength for both banks and non-banks, according to the Q1 Asset-Based Lending Index. Banks again reported three-year lows for criticized and classified loans and non-accruing loans. Gross write-offs also declined for banks.
Non-banks also showed strong performance in their portfolios: 90% reported a decrease in or consistent level of non-accruals.
“A key question is whether such strong portfolio performance can continue,” the report said.
The asset-based lending market may face new challenges in subsequent quarters amid major global events, including rising energy and commodity prices caused by Russia’s invasion of Ukraine, continued supply chain disruptions and threats of recession.
“High energy prices and supply shocks have helped sustain a historically high level of inflation that is unlikely to decline quickly,” the report said.
Still, the ABL market has persevered in all sorts of economic environments over the years.
“It’s not all gloom for the U.S. economy. The labor market remains a bright spot, with strong job growth and the unemployment rate holding at 3.6%,” the report said. “Manufacturing also has proven resilient to high energy prices and surging input costs, with capacity utilization at its highest point in more than decade. And importantly, consumer spending remains strong, sustained in part by left-over fiscal support measures from 2021.”
For a broader view of ABL trends and this industry, visit SFNet’s Annual Asset-Based Lending Industry Survey for 2021.
Founded in 1944, the Secured Finance Network (formerly Commercial Finance Association) is an international trade association connecting the interests of companies and professionals who deliver and enable secured financing to businesses. With more than 1,000 member organizations throughout the US, Europe, Canada and around the world, SFNet brings together the people, data, knowledge, tools and insights that put capital to work.