Banking Outlook: Bankers predict flat loan demand for 2010

According to a recent survey by the Wisconsin Bankers Association, most bank CEOs in the state believe that commercial loan demand will remain flat for at least the first half of 2010.

Bankers also are unlikely to increase lending significantly because of the continued economic uncertainty, according to James Johannes, senior associate dean at the University of Wisconsin School of Business and director of the Puelicher Center for Banking Education.

“I think banks will be very cautious going ahead and will be mindful of the condition and multitude of risks facing us in the economy in the near term,” Johannes said.
Banks are also facing increased scrutiny from federal regulators such as the Federal Deposit Insurance Corp. (FDIC), Johannes said.
“The regulators are right – now is not the time to take excessive risks in banking,” he said. “There is a lot of uncertainty in the economy – the potential fallout in commercial real estate, the concerns on how the (federal) government will unwind these huge deficits and huge concerns about state and local (government) finances.”
However, some Milwaukee-area bank executives are optimistic about commercial lending in 2010.
“On the macro side, I would agree (with the survey). Things are going to be flat,” said Dave Vetta, president and CEO of First Business Bank-Milwaukee. “In 2010, flat is not bad, it’s good. A lot of businesses have streamlined, and if we can be flat, that is not a bad thing, as long as we don’t take a step back.”
Vetta saw loan volumes rise slightly in late 2009 and believes that pattern will continue this year.
“I am seeing a little bit of the logjam breaking up in 2010,” he said. “Businesses have been on the sidelines, streamlining, looking to expand and looking at new products. People are optimistic about the political environment improving. But, the floodgates are not opening by any stretch.”
James Popp, president of Wisconsin and Minnesota for Chase Bank, said the bank’s commercial loan volumes fell in Wisconsin during 2009, as many of its customers were down 30 to 50 percent. Because many of its clients are not forecasting dramatic recovery this year, Popp is forecasting a relatively flat 2010.
“Our clients have capacity in their existing lines of credit and other (credit) facilities,” he said. “As we’ve looked at it, we have not seen anything that dramatic in recovery going on, but no decline either. It’s sort of a flattening out, a bumping along.”
P. Michael Mahoney, chairman, president and CEO of Milwaukee-based Park Bank, said that while his bank is not forecasting an increase in demand from existing commercial customers, it believes it will grow new commercial clients this year.
“We do see some opportunities for new business, but they will have to be underwritten more severely because of (economic) uncertainties more than regulatory pressure,” Mahoney said. “There will be more time spent in the discussion area than there has been in the past – a better understanding of the expenditure and what it will produce as far as the ability to repay the debt.”
Banks that play heavily in commercial real estate projects will see even lower demand for loans.
Tri City National Bank forecasts little to no growth I ncommercial lending this year, largely because the bank’s commercial loan portfolio largely consists of real estate-related projects, said Ronald Puetz, chairman and CEO.
“Until the excess inventory is sold (in real estate), there will be little to no development,” he said. “These days, the banker doesn’t have to ask himself if the lots will sell. There is no loan demand, because developers don’t want to create residential real estate lots when there is a glut of those on the market already. We don’t see any increase for real estate development.”
Greg Smith, senior vice president and chief financial officer with Milwaukee-based Marshall & Ilsley Bank, agreed and said the bank is seeing virtually no demand for real estate-related commercial loans.
“There is not much demand for commercial real estate or construction related credit,” Smith said. “What you see in commercial real estate is refinancing more than anything else.”
M&I does not expect other commercial lending to be strong this year.
“Generally, in terms of commercial companies, we are seeing that they had been hesitant in 2009 to make incremental capital expenditures and any bank is seeing that demand in 2010 will be directly related to what the strength of economic recovery will be,” Smith said. “We’re in one of those periods now where although our economic recovery is looking stronger than many would have thought it would have six months ago, it’s nowhere near enough to have a crystal ball for the next six months.”

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