SFNet Annual and Q4 2020 ABL Survey Analysis

The fourth quarter of 2020 showed a tale of two cities between the bank lenders and the nonbank lenders.  On a quarter-over-quarter basis, bank lenders in the fourth quarter showed flat total commitments with a drop in outstandings while the nonbanks showed double-digit percentage increases in both commitments and outstandings.  At the bank level, new commitments approximated commitment runoffs, perhaps showing signs of stabilization while nonbanks increased on their third-quarter momentum of closing more deals than runoff in both commitments and outstandings. For both banks and nonbanks, there was a common theme of low utilization with the fourth quarter of 2020 showing the lowest utilization levels in recent history.

The quarterly report is segregated into a bank/non-bank classification while the annual report is combined, with specific bank/non-bank classifications in certain areas. Both surveys had comparable number of respondents with prior quarters and years with 34 participants for the annual survey and 35 participants for the quarterly survey.

Confidence Index – At the time of completion (February), there was no major shift in forward-looking confidence levels for the banks, however, nonbank lenders showed a meaningful decrease in expected demand in the next three months.  This decrease may be because nonbanks rely partially on attrition from the banks for new business, something that has not materialized or at least has not materialized at expected levels.

Asset Growth

Quarterly Survey:  

Bank lenders remained relatively flat in growth from quarter to quarter, decreasing only 0.4% quarter over quarter, from $243.3B of commitments to $242.3B of commitments.  New Commitments and Commitments Runoff were at levels very close to each other, both with levels around the $8B mark, an increase over prior quarter and the same quarter last year.  Similarly, New Outstandings and Outstandings Runoff both had increases over prior year and prior quarter, however New Outstandings did outpace runoff.  The foregoing suggests that this may be the start of some signs of stability in the market.  However, Utilization rates are at an all-time low for the bank lenders, decreasing to 31.2% in the fourth quarter of 2020.  Due to the robust capital markets environment, which provided alternative sources of liquidity, there does not seem to be very much that can be done to encourage greater utilization, however, with increased economic activity, the expectation is that utilization should eventually rise as working capital needs increase.

Nonbank lenders showed the largest increase in new commitments since the pandemic hit in early 2020, increasing by 63.2% from the third quarter or close to $600 million.  New outstandings also outpaced outstanding run offs, however, when the fourth quarter new outstandings is compared to the fourth quarter new commitments, it seems that deals that were booked in the fourth quarter had an overall lower utilization rate.  Utilization at the non-banks also dipped to a record low of 33.5%, however, the decline is much less than that of the bank lenders.

Annual Survey:  

The annual survey showed what much of the quarterly survey suggested and that opportunities may have shifted from banks to nonbanks.  Overall, 63.6% of bank lenders reported an increase in total commitments in 2020 while an overwhelming 91.7% of the nonbank lender reported an increase.  In addition to the opportunity shift, the survey also shows the nonbanks going up market with 15.7% reporting an increase in average new commitment size.  Annual credit line utilization showed a shift of 1,000 basis points for banks from 39.7% to 29.7%; while the nonbanks also reported a decline, it was not as steep as the banks. 

Asset Quality

Quarterly Survey:  

Asset quality continued to improve in the bank sector since the pandemic hit in the first half of the year.  The improvement in asset quality could be attributable to several reasons including lower utilization and a robust capital market leading to a higher confidence that liquidity is readily available if needed.  In addition, the survey suggests that credit quality is heading back toward pre-pandemic levels with notable decreases across the board in Non-Accruing Loans, Criticized/Special Mention Loans and Gross Write-Offs. 

In the nonbank sector, the fourth quarter showed a slight increase in non-accruing loans as a percentage of total loans outstanding – this has been the trend for all quarters in 2020.  The second quarter showed a bigger increase due to changes reported by one lender – without this lender, it would have been 1.35%.  The trend is materially differently than that of the banks and could possibly demonstrate the lack of alternative capital sources for non-bank borrowers compared to large bank borrowers.

Annual Survey:  

The trends noted in the quarterly summaries carried forward to the annual survey.  Overall, non-accruals as a percentage of outstandings increased in 2020 with significant increases from the nonbanks over the banks.  Looking at the historical percentages shows that, though still an increase from 2019, overall, if compared to other historical periods of broader macroeconomic financial stress, the percentage is still relatively low supporting the thesis that the liquidity in the market protected the portfolios this time around.  It is important to note that many times the credit-metric deterioration may lag behind the actual economic event, however, it would seem to suggest that 2020 was indeed more of a health crisis than a systemic financial crisis. 

Revenues and Expenses:  

Revenue as a percentage of outstandings for banks increased in 2020 due to decrease in outstandings for the year as compared to 2019.  Consequently, loan fee income, which is generally constant regardless of utilization, increased as a component of lender revenue while net interest income decreased.  For the nonbanks, revenues as a percentage of outstandings decreased in 2020.  Net interest income and loan fee income components stayed relatively flat compared to prior years.  The decrease in revenue percentages could be attributed to the rate environment in 2020 versus that of 2021.  This may be more prominent in nonbanks as their outstandings did not experience as steep a decline as the banks and generally seemed to have started to bounce back towards the latter half of the year, stabilizing these yields.

Direct expenses as a percentage of outstandings stayed flat for the banks while the non-banks saw a 49-basis-point increase.  Looking directly at the personnel expenses as a percentage of outstandings, banks stayed relatively flat versus 2019, whereas non-banks grew by 38 basis points leading to the conclusion that banks adjusted their employee count based on outstandings, whereas the nonbanks did not.