Confidence in the asset-based lending market in the second quarter was driven by hopes of a soft landing for the U.S. economy, according to data released by the Secured Finance Network. But lingering headwinds and recession risks still must be taken seriously.

SFNet surveyed bank and non-bank asset-based lenders (ABLs) on key indicators for its quarterly Asset-Based Lending Index and SFNet Confidence Index.

The industry expressed “cautious optimism for a soft landing,” said SFNet CEO Richard D. Gumbrecht. “The industry remains healthy overall, and fares well in both growing and receding economies, but uneven demand for new business and a return to more typical portfolio performance will require lender vigilance.”

Asset-based lenders continue to demonstrate their value, the report said, and maintain a positive outlook for secured finance demand in coming quarters. Expectations for client utilization dipped slightly for both lender groups, while hiring declines were tempered by elevated expectations in previous quarters.

Survey highlights

For banks, asset-based loan commitments (total committed credit lines) were up 1.7% in Q2, a slight rise compared to the previous quarter. Outstandings (total asset-based loans outstanding) fell by 2.3%.

“Overall, growth in commitments and outstandings varied from bank to bank,” the report said, “with nearly half reporting growth and the other share reporting declines.”

Still, the weighted average quarter-over-quarter growth among bank respondents for both commitments and outstandings has remained positive across the majority of reported quarters, the report said.

Commitment runoff decreased by 5.3% from the first to second quarters.

Non-banks, meanwhile, reported flat total commitments and a decline in total outstandings. New commitments jumped nearly 70% from Q1 to Q2, but commitments runoff also increased sharply, up by 94.2%, and net commitments increased only slightly. New outstandings increased by 51.7% and outstandings runoff increased by 69.6%. As with the banks, growth in commitments and outstandings varied among non-banks.

In terms of credit-line utilization rates, both lender groups reported decreases from the first to second quarters: from 41.3% to 39.9% for banks and from 52.8% to 48.2% for non-banks.

“As in prior quarters, the vast majority, 91.7%, of the bank borrowing base in Q2 2023 was composed of advances against receivables and inventory. The remaining categories composed only 8.3% of the overall borrowing base,” the report said.

ABL portfolio performance proved interesting in the most recent Lending Index.

“While portfolio performance declined for banks, it held within the historical range and met expectations as banks increasingly scrutinize portfolios for risk,” the report said.

Banks reported higher levels of criticized and classified loans and non-accruing loans. However, write-offs declined slightly as a share of outstandings. Non-bank portfolio performance was strong, with non-accruals down 10.8% and write-offs remaining flat at zero.

“With minimal write-offs for both lender groups, ABL portfolios remain healthy,” the report said. “Despite the decline in portfolio performance for banks, it is important to note that the drop in bank expectations follows several historically strong quarters when performance was about as good as it gets. So, banks may generally anticipate that performance will decline, but they do not necessarily expect it to become a problem.”

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