Competition Pushes US Banks to Ease Credit

Competition to lend to large US companies is forcing banks to start easing credit terms according to the latest Federal Reserve survey of senior credit officers.

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Twenty-eight out of 30 banks that eased some of their terms on business lending in the past three months said “more aggressive competition from other banks or non-bank lenders” was important in their decision.

Growing competition to lend to prime corporate borrowers is one of the first signs of “animal spirits” returning to the US banking sector.

It will fuel hopes that growth will be less constrained by credit and deleveraging during 2011.

Banks are preparing for lending to become more competitive.

Wells Fargo, which makes one out of three US commercial loans, plans to hire about 240 commercial bankers this year, a 10 percent increase over current staff levels.

Large companies may also be finding an appetite to borrow, especially for mergers and acquisitions.

Of the 57 banks covered by the survey, 20 said demand for loans from companies with sales of more than $50 million was up, compared with only four that reported a drop.

The start of January was marked by a record level of M&A and 77 percent of banks that reported an increase in loan demand said deal financing was a somewhat or very important reason for it.

Paul Dales, senior US economist at Capital Economics in Toronto, said that loan demand is a good leading indicator of actual future lending.

“Pretty much throughout the last three years, bank lending has been declining. The pick-up in loan demand is a promising sign that may be going to change,” he said.

“Through another quarter, we see more banks operating lending standards that are more conducive to free flow of credit,” noted Eric Green of TD Securities in New York. “This has been the Achilles heel of the recovery, and it should be noted that lending still remains depressed, but it is the momentum we care most about.”

If most of the increased loan demand is for M&A, however, it may be slow to feed through into higher investment in the economy.

The scope of easier credit also remains limited: large banks say they are lending more to large companies, but life has become no easier for small companies and small banks.

There was also little sign of any improvement in lending for either commercial or residential real estate.

On commercial real estate lending, six banks said they had eased terms, but another six tightened them.

More than 30 percent of the banks surveyed reported a fall in demand for prime residential mortgages– compared with only 6 percent that reported an increase.

That adds to evidence that housing will make little contribution to economic growth during 2011 and may suffer a further dip in prices.

Banks had an optimistic outlook for the rest of 2011.

Large majorities of banks expected their business, commercial real estate and residential mortgage loans to improve in quality with only a few banks expecting a decrease.