Diversifying with C&I Lending

The challenges banks faced early in 2023 amid high-profile bank failures highlighted liquidity issues and pushed many banks to focus on deposit growth. Additionally, economic conditions in the aftermath of the COVID-19 pandemic, including rising interest rates and an increase in remote work, have put additional pressure on banks, particularly those that are heavily concentrated in Commercial Real Estate (CRE) lending. These pressures have led to credit downgrades for some banks, causing them and others to look towards a diversification of their lending portfolios with Commercial and Industrial (C&I) loans playing an increasing role.

It’s important to understand where we are today, and how we got here, so bankers looking to grow their business can successfully navigate the current landscape in order to develop stronger, sustainable lending relationships.

The Landscape

Increased bank reserve requirements passed in the wake of the financial crisis in 2007-08, required banks to maintain a Liquidity Coverage Ratio (LCR) sufficient to fund cash outflows for 30 days (100% of projected cash outflows in a stress scenario). These liquid assets were classified as cash (reserves at the Central Bank), certain mortgage-backed securities, liquid corporate bonds and governmental securities. Many banks started buying bonds to get a return on their money.

The rising interest rates instituted by the Federal Reserve to combat inflation over the past year have been seemingly effective in slowing inflation while thus far avoiding a recession. However, the aggressive pace of these rate hikes (more than 500 basis points over 16 months) put pressure on those assets, particularly bonds. The inverse relationship between interest rates and bond price led to a devaluation of those bonds and losses in banks’ treasury portfolios.

At the same time, higher interest rates are causing trouble for CRE loans. Generally, CRE loans amortize over 20 years, but they mature 5, 7 or 10 years from origination, at which point the bank typically renews the loan under a similar structure. The rising interest rate environment poses risks to both borrowers and banks, in that borrowers with loans reaching maturity and renewal will experience a significant increase in their rate and payment. If increased costs lead to increased defaults, the unpaid loans put further stress on the CRE lenders.

Diversifying Lending by Increasing C&I Loans

For lenders, the challenge now is to adjust to the current environment and adapt business development strategies for successful growth. There are ample opportunities for banks to lend, particularly in the middle market, where 60% of business owners are looking to invest in their businesses in the coming year. With C&I lending, banks can support these company initiatives, providing necessary cash flow and funding for capital expenditures. As these loans are backed by collateral that is not tied to real estate, banks avoid the risks associated with CRE. Additionally, the shorter terms in C&I remove the risk of defaults due to the ballooning payments at maturity characteristic of CRE lending. Utilizing C&I lending as part of a bank’s business development strategy can help strengthen the lender’s portfolio from a risk management perspective, and enhance relationship development. To do this, bankers need a strategy to identify prospective companies and reach out with timely messaging.

Identifying Opportunities

For you as a banker, as you seek to identify and target prospect companies for new lending opportunities, it’s essential to know what you’re looking for and where to look. When searching for companies that fit your bank’s ideal profile, whether that’s based on geography, revenue, employee count, loan filings or some other factor, having access to that information can help you refine your target list. Once you find your target companies, you also need to know who to contact and what is important to them.

Using RelPro’s business development solution for bankers, you can filter & search based on the firmographics relevant to your bank to identify target companies and then quickly access contact details and biographical information for key decision-makers at those companies. You can even review relationship mapping to compare common connections to help with a warm introduction to support your initial outreach.

Become a Trusted Advisor

With your target list in hand, you can now dig deeper to truly understand the businesses and the executives you will reach out to. Using Buyer Intent signals, you can get a better understanding of what financial products & services companies are searching for. This enables you to refine your company search based on the services you are equipped to provide. It also allows you to shape your conversation to what is important to your prospect as opposed to what is important to you. You can also leverage industry intelligence to get a deeper understanding of the challenges specific to your prospect and their business. RelPro partners with IBISWorld and Vertical IQ to support your deeper research into a prospect’s industry.

The past year has delivered its share of challenges for banks and for businesses. While interest rate increases and economic uncertainty have impacted banks and their CRE business, lending opportunities still remain. Mid-market businesses are optimistic heading into the next year and plan to grow and invest in their companies, and they will need capital to do this. Through C&I lending, banks can diversify their loan portfolio to strengthen their business. Using a solution like RelPro to establish your total addressable market of prospect companies, these banks can boost the efficiency of their business development strategies.