Tag Archives: small business

Signs of life in small business banking

Over the past year, the main issue in the business banking sector has been the decline in loans to small businesses.  Many business owners claim that the available of working capital for their businesses has dried up, while banks claim that there has been a significant fallout small business loan demand.  At the same time, we are seeing mixed news from surveys on small business optimism.

However, we are now seeing some signs that banks are beginning to turn their attention to the small business market.   This refocusing on the small business market is in part driven by a perception that small business credit woes have bottomed out: Bank of America reported in its 2Q10 financials that the charge-off rate for its small business commercial-domestic loan portfolio had declined for the third consecutive quarter, from a high of 17.45% in 3Q09 to 12.94% in 2Q10.

Although data on small business lending banks can be spotty, there are signs that banks are starting to increase lending to this segment.  In August, the Federal Reserve’s survey of bank lending practices found an easing of lending standards for small businesses.  Chase reported in its 2Q10 financials that business banking origination of $1.2 billion in 2Q10 was twice the level of 2Q09.

Some recent business banking initiatives by banks:

  • Provision of new online services.  In August, First Tennessee Bank introduced the Business Resource Center, featuring a series of tips and resources for businesses, covering banking and non-financial topics.  In the same month, BB&Tlaunched a new series of small business webinars.  In September, U.S. Bank introduced Scorecard, an online reporting too that enables small businesses to track their own spending
  • Advertising: American Express OPEN launched its “Start Booming” advertising campaign in July.
  • Hiring of dedicated small business personnel: In June , Sovereign  Bank accounted that it was adding more than 200 Small Business Specialists.  In August, Huntington Bank reported that it has exceeded the commitment made earlier in 2010 to hire an additional 150 small business bankers.
  • New products and offers: In June, Chase launched an innovative new small business loan program, Chase Loan for Hire, featuring a reduction in the interest rate for every new hire made by the small business customer.  In September, Comerica launched the ‘Office Perks’ campaign, featuring a series of offers, including $200 for opening a business checking account.  The same month, Citibank offered a $250 prepaid card for opening a qualified business checking account and signing up for at least one cash management service

The small business segment has traditionally been very profitable for banks.  So, as small businesses emerge from the recession, bank will want to be sure that they have the elements in place to once again build their small business franchises.

Small Business Credit Card Fallout

The recent decision by Advanta to stop lending to its small business credit cardholders from June 10 underscores the challenges faced by small business credit card issuers. Advanta is in a unique position insofar as it is 100% exposed on the small business market, and its managed charge-off rate of almost 16% in 1Q09 underscores the scale of its challenges. However, leading banks with large small business card portfolios are also under severe stress. In fact, the viability of small business credit cards in their current configuration is open to question.

Issuers are already changing key elements of the small business card offer to mitigate the significant default risk. We have seen huge increases in APRs and decreases in credit limits. But how much further will issuers go? Will issuers introduce annual fees? Will we see secured small business cards?

There is also evidence that banks that have significant small business credit card portfolios (Bank of America, Chase, Citi, Wells Fargo) are narrowing their focus to their small business customer base. This is seen in the dramatic reduction in small business credit card direct mail acquisition volume. In addition, some of these banks no longer accepting unsolicited online applications.

Are Banks Lending to Small Businesses?

The media has been quick to point out instances where banks have stopped lending to small business clients, either by reducing or eliminating lines of credit, changing terms, upping APRs, or simply refusing loans. The truth is that lending demand has also slowed appreciably, at the same time that banks are looking for ways to reduce risk.

But given all the bad press that is out there, banks are making sure that prospects and clients alike are seeing them less as the villains in a down economy, and more as partners who are in it for the long haul.

Today, to help manage its image despite its crippling losses, Citigroup announced that it is using its TARP monies to fund nearly $45BN in loans. While it is making loans to local governments, municipalities, universities and non-profit hospitals to stimulate local growth, Citi points out that it has been making loans to small businesses as well as consumers.  According to the report, “New lending to U.S. individuals and families, small and mid-sized businesses and large corporations, along with underwriting activity, totaled $120.1 billion in the first quarter of 2009, up from $81.2 billion in the fourth quarter of 2008.”

So what does that mean for small businesses specifically? According to Citi, small business loan balances outstanding rose from $1.1BN in March 2008 to $1.3BN in March 2009. Not much of an increase in the grand scheme of things, but $200MM is enough for Citi to report that it is lending, just like its peers.

The full report, which has the catchy title, “What Citi is Doing to Expand the Flow of Credit, Support Homeowners, and Help the U.S. Economy,” can be found on Citi’s website.