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Alternative Lenders Take Aim At Traditional Commercial Clients

Banks that have been grappling with lukewarm commercial loan demand are now facing a new headache: heightened competition from alternative sources of credit. Commercial and industrial portfolios appear to be the most vulnerable to these lenders that include investment funds, business-development companies and others operating outside the traditional banking industry. Novantas clients report that private lenders are targeting mid-size companies that are the bread-and-butter lending clients of regional banks. These lenders often don’t provide a full spectrum of services, but pursue specialized areas like bridge financing in M&A deals.

Still, the impact can be seen in Novantas’ latest deep-dive quarterly analysis of commercial-banking trends. Alternative lending sources grew at 7% in the fourth quarter of 2017 compared with year-ago levels, while bank C&I lending grew at only 3%.

The difference on the commercial real estate front is less dramatic, but may still be troublesome to traditional lenders. Alternative lending sources grew at 6%, while bank CRE lending grew at 5%.

A recent “shadow banking” study by The Financial Stability Board found that the sub-segment of business-development companies and other private lenders is growing at 8% annually and may account for as much as 30% of total financial assets globally.

The shift to commercial clients follows similar developments in the retail-banking landscape, where the new lenders are focused on creating a unique client experience that often includes simplicity and faster turnarounds.

The trends come amid a backdrop of continued challenges in commercial loan growth. Banks tracked quarterly by Novantas saw 3% loan growth in Q4 2017, representing a steady decline from 8% in 2Q 2016. In addition to the rapid growth of alternative credit sources, a build-up of corporate liquidity is another contributing factor.

Finally, the new tax law may help both the banks and market-based lenders. There is already a sense in the market that the law has bolstered the confidence of corporate borrowers; recent H8 data shows improved growth in C&I lending for the banks. Other recent changes allow increased leverage for market-based lenders, raising the debt-to-equity ratio. Many of these companies are not leveraged to that level now, but they will have more headroom if they want to expand more rapidly.


Pre-tax ROA Remained Relatively Flat At 198bp As NIM Decreased Slightly: Profitability fell by 1bp this quarter as NIM fell by 3bp. Balance growth remained weak as deposits increased by 1.9% QoQ and overall loan growth was only  0.5%.


1Fed Flow of Funds. Autonomous. Lines of business in the “all other” category include CP (Commercial Paper),
ILT (Institutional Leveraged Loan Franchises), ICB (Commercial Bonds), HYB (High Yield Bonds), NBL (e.g., Non-Bank Lending/FinTech).


To read the full report, download the PDF


Zack Cagley
Manager, Chicago

Mike Rice
Managing Director, Chicago

Bob Warnock
VP, Industry Analysis, Chicago

For more information, contact Novantas Marketing

+1 (212) 953-4444

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