March 21, 2023 | Stamford, CT — U.S. banks are increasingly nervous about the credit quality of corporate borrowers. Banks’ growing concerns were evident in tightening lending standards and lower loan volume in Q4 2022—well before the collapse of Silicon Valley Bank sent ripples through the banking industry and global financial markets. 

“The quick emergency action by the U.S. Federal Reserve seemingly stopped the SVB and Signature Bank events from completely eroding client confidence,” says Gregory Schneider, Director, Greenwich Commercial Loan Analytics at Coalition Greenwich. “But continued banking instability, evidenced by First Republic Bank’s peer bailout, will create significant challenges for all but the largest lenders.  Now is the time for banks to sharpen the pricing of their loan book in an effort to stem eventual NIM compression.” 

U.S. Banks Tightening Credit Standards
Approximately 45% of commercial & industrial (C&I) lenders and 60% of commercial real estate (CRE) lenders tightened credit standards in Q4 2022, according to data from the Federal Reserve’s January 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices. That survey also showed significant net shares of banks tightening loan covenants and collateralization requirements to firms of all sizes.

The main driver for banks tightening C&I lending standards was a perceived deterioration in the business environment, as evidenced by concerns about the economic outlook and subsequent reductions in risk tolerance. However, banks also named liquidity issues as a reason for tightening lending standards. Nearly half of banks who tightened C&I credit standards cited decreased secondary market liquidity as a contributing factor, and nearly a third cited deterioration in their own current or expected liquidity position. 

Data from Greenwich Commercial Loan Analytics show that banks are not optimistic about the business environment in 2023 and do not expect any quick reversals on current credit policy trends. Those results align with additional data from the Fed’s Loan Officer Survey showing that major net shares of banks expected to tighten standards for C&I loans to firms of all sizes and for all types of CRE loans over 2023.

Rising Loan Pricing Pressuring Corporate Borrowers
Pricing on fixed-rate C&I loans increased by more than 2.50% in the 12-month period from Q4 2021 to Q4 2022. The unrelenting rise in financing costs is increasing pressure on a highly leveraged corporate sector. In March 2023, S&P Global Ratings forecasted that the combination of rising finance costs and weaker corporate earnings will increase the 12-month trailing default rate of non-investment-grade-rated companies to 4% by December, up from a historically low 1.7% at the end of 2022.

Greenwich Commercial Lending Market Insight is a quarterly review of data and analytics from the Greenwich Commercial Loan Analytics team.