Data from the Secured Finance Network revealed generally mixed results in the asset-based lending market for the third quarter, with deal activity receding in response to fewer new client commitments, and the portfolio performance index improving for both non-banks and banks against already historically strong levels.

Banks and non-banks alike had neutral expectations for industry conditions, with about two-thirds of each group anticipating conditions to stay unchanged. (That cautious assessment may have reflected pre-election uncertainty, as most lenders responded to the survey before November 5.) Still, asset-based lenders have a healthy industry that is poised for growth against the backdrop of an economy whose positive and continuing job growth, historically low unemployment, and steady upswing in real consumer spending has consumers and businesses feeling better about their future prospects. One caveat, however, is that the benefits of lower taxes and relaxed regulatory climate signaled by the incoming Administration could be offset by stiff new tariffs that would depress economic growth, aggravate inflationary pressures, and make future Fed rate cutes fewer and smaller, according to the survey report.

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

“Lenders report that portfolio performance is improving due to fewer bankruptcies and riskier borrowers holding their own,” observed SFNet CEO Richard D. Gumbrecht. “Looking ahead, lenders expect increased mergers and acquisition activity and business investments to become catalysts for growth and are confident they can meet new demand.”

The Lender Confidence Index saw bank and non-bank lenders’ sentiment scores meeting at about the same place – a small uptick for banks (to 56.1) based largely on modest improvements in business demand, portfolio performance, employee headcounts and overall business conditions, and a tiny dip for non-banks (to 57.1), where improvements in business conditions and portfolio performance were cancelled out by falling demand, headcount, and utilization scores.

Banks and non-banks had roughly similar, and positive, scores for expected new business demand (71.7 and 64.3, respectively). Given that bank expectations went up (+6.5) while non-bank expectations went down (-17.9), it’s not surprising that more of the banks (52%) than the non-banks (36%) were bullish about improvements in the next quarter.

Headcount expectations largely tracked those for demand, up 4.3 to 52.2 for banks and down 10.7 to 57.1 for non-banks. The results suggest steady employment within the industry, since the vast majority of banks (78%) and non-banks (86%) think headcounts will stay the same.

Banks remained slightly positive about utilization, with an unchanged 60.9 score, and none of them expect utilization to decline. The utilization index for non-banks, however, edged down by 3.6 to 57.1.

Survey highlights

Total commitments and outstandings for banks were largely flat in Q3, at -0.2% and +0.4%, respectively.

“Deal activity slowed in Q3 as commitments with new clients fell by 6.6% Q/Q; meanwhile, commitment runoff increased by 29.6% Q/Q,” the report stated. Since commitment runoff outpaced new commitments, net commitments shrank from $512 million to $323 million in the quarter, while new outstandings and outstandings runoffs similarly went in opposite directions – the former down 17.9% Q/Q and the latter up 35.7% Q/Q.

Portfolio performance held steady for banks. Criticized and classified (C&C) loans (+12 basis points), non-accruals (+5) and gross write-offs (+2) all inched up as a share of outstandings, but the majority of bank respondents said that their overall levels of C&C loans, non-accruals, and gross write-offs either decreased or didn’t change.

Total commitments for non-banks were up slightly (+4.3% Q/Q) and total outstandings were down roughly the same (-3.0% Q/Q). While new commitments (-32.7%) and commitment runoff (-13.9%) also declined in the quarter, the greater drop-off in new deals caused net commitments to plummet, from $448.2 million to $192.2 million.

And, since new outstandings dropped 40.5% Q/Q even as outstandings runoff almost doubled (+98.0 Q/Q), net outstandings also plummeted in Q3, from $318.2 million to -$38.3 million.

Non-banks had a better portfolio performance in the quarter. Non-accruals and gross write-offs both declined as a share of outstandings. “Moreover, nearly all non-banks reported that their non-accruals decreased or did not change, and all reported that their gross write-offs decreased or did not change,” noted the report.

As bank commitments slipped down while outstandings crept up and the opposite happened for non-banks (commitments rising and outstandings falling), the utilization rates for each category went in different directions: Up 0.16 % for banks, to 36.8%; down 3.51% for non-banks, to 46.7%, in Q3.

“Utilization rates for both banks and non-banks were below their long-term historical averages in Q3 (40.1% and 48.5%, respectively),” said the report.