Small Business Lending a Bright Spot For Bank Earnings

As of last week, most major banks have reported second-quarter earnings. Traditional banking, the business of borrowing and lending, remains slow and banks are receiving more deposits while lending books are not keeping pace. The reluctance to lend is partially driven by a decreasing margin between the borrowing rate and lending rate, the so-called Net Interest Margin. As an example, PNC Bank, whose debt SNWAM holds in many portfolios, reported a decrease to 3.12% from 3.58% a quarter earlier. Intense competition between banks explains part of the spread compression, tight lending standards, a holdover from the Great Recession, perhaps explains the rest.  Fortunately, a loan officer survey conducted by the Federal Reserve claims this trend is changing. Some banks have been easing credit standards for small businesses since 2012 and, according to a New York Times article, 20% of small-business loans were approved in June, up from 9% three years ago. This is still well below the peak of 36% pre-crisis. Additional lending is welcome for banks struggling to fill the void left by shrinking mortgage businesses. For bank credits, we are broadly pleased with efforts to increase lending, especially in an environment of persistent job creation, where additional risk-taking could benefit top-line growth.