Steady confidence in the asset-based lending market marked the fourth quarter, according to data released by the Secured Finance Network. Lenders maintained a positive outlook despite persistent inflation and rising interest rates.
SFNet surveyed bank and non-bank asset-based lenders (ABLs) on key indicators for its quarterly Asset-Based Lending Index and SFNet Confidence Index.
“As the U.S. economy remains under stress, the asset-based lending industry is primed to meet new demand,” said SFNet CEO Richard D. Gumbrecht. “Commitments have increased and portfolio performance remains solid. Should we see a recession, the ABL industry stands ready to provide vital working capital.”
In the most recent Confidence Index, lenders pointed to the resiliency of an industry that Gumbrecht describes as having “all weather” status. The most positive expectations were in the demand for new business, hiring and client utilization. But banks and non-banks shared low expectations around the overall business conditions.
Survey Highlights
For banks, asset-based loan commitments (total committed credit lines) were up 2.4 percent in the fourth quarter compared to the previous quarter. Outstandings (total asset-based loans outstanding) fell by 1.6 percent, however. Commitment runoff increased by 7.8 percent quarter over quarter.
“Both new commitments and commitment runoff remain well below their year-ago levels for banks reporting in Q4 2021 and Q4 2022,” the report states. “Lower new commitments and higher commitment runoff reduced net commitments in Q4, the second consecutive quarter of decline.”
Non-bank lenders, meanwhile, saw total commitments rise by 6 percent last quarter. Total outstandings were up, as well, by 1.7 percent. Compared to the same quarter last year, total commitments and outstandings for non-banks rose by 10.4 percent and 18.6 percent, respectively.
“Further, a large majority of non-banks reported increased new commitments in Q4, which grew by 277 percent from Q3,” the report states.
Commitments runoff dropped by 21.9 percent from the third quarter. A sharp rise in new commitments and decreased runoff caused net commitments for non-banks to reach their highest level since Q3 2020, the report states.
In terms of credit-line utilization for bank lenders, the rate fell to 40.1 percent, marking the second consecutive quarterly decline after more than a year of growth. Non-banks saw a similar trend: Their combined utilization rate dipped from a multi-year high of 59.6 percent in Q3 to 53.8 percent last quarter.
“The drop for both bank and non-bank rates suggests that the ABL industry is returning to traditional seasonal fluctuations in utilization,” the report states, “as borrowers pay down outstanding balances, they typically build up in the third quarter of the year as they prepared for the holiday shopping season.”
As for portfolio performance at the end of 2022, banks started to see movement toward “more normal levels” after record strong performance in previous quarters. For banks, criticized and classified loans, non-accruals and gross write-offs all rose in Q4 relative to Q3 but are still at levels well below historic highs. Non-banks continued to report solid portfolio performance; 30 percent of survey respondents reported a decrease in non-accruals quarter-over-quarter and none saw an increase.
Now, in early 2023, the U.S. economy is at a fork in the road, the report states. “A strong labor market and low energy prices could continue to propel the economy; or, persistent inflation, weak real income growth and sectoral slowdowns could prompt a recession. For now, a period of relatively weak growth is the best bet, but asset-based lending, as an “all-weather” industry, is well-positioned to meet new demand in any scenario.”