Skip to main content

Looking for Valuant? You are in the right place!

Valuant is now Abrigo, giving you a single source to Manage Risk and Drive Growth

Make yourself at home – we hope you enjoy your new web experience.

Looking for DiCOM? You are in the right place!

DiCOM Software is now part of Abrigo, giving you a single source to Manage Risk and Drive Growth. Make yourself at home – we hope you enjoy your new web experience.

Looking for TPG Software? You are in the right place!

TPG Software is now part of Abrigo. You can continue to count on the world-class Investment Accounting software and services you’ve come to expect, plus all that Abrigo has to offer.

Make yourself at home – we hope you enjoy being part of our community.

Lending & Credit Risk Ag Lending C&I Loans Commercial Lending Construction Lending Credit Risk Management Member Business Lending Small Business Lending

Prepare for stronger C&I lending demand: A $1.7 trillion “wave”

Mary Ellen Biery
July 21, 2024
Read Time: 0 min

Ready to catch the next wave of lending growth? 

Commercial and industrial lending (C&I) will be the next big performance driver for banks and credit unions. Financial institutions should get ready now.

You might also like this paper on how institutions can produce smarter, faster lending.

DOWNLOAD

 

Takeaway 1

If opportunities to drive bank or credit union performance are like the waves surfers seek. C&I lending will be the next “bomb.”

Takeaway 2

Cornerstone Advisors sees the potential for a $1.7 trillion surge in commercial lending during the next upcycle.

Takeaway 3

To fully capitalize on the forthcoming C&I wave, institutions need the right products, systems, people, and technology.

Drive growth

The big C&I lending wave is coming

If opportunities to drive bank or credit union performance are like the waves surfers seek constantly, C&I lending will be the next “bomb,” according to Joel Pruis, Senior Director and Lending & Operations Practice Lead at Cornerstone Advisors.

In surfing, a bomb is an especially large or heavy wave, and Pruis believes C&I lending can be the next big performance driver for financial institutions. During Abrigo’s recent ThinkBIG conference, Pruis encouraged lenders to overcome current obstacles to growing their C&I portfolios to gain their share of what could be a $1.7 trillion surge in new C&I balances during the next economic expansion.

Pruis outlined:

  • What’s at stake for lenders
  • Common obstacles to sound C&I lending performance
  • Steps that will enable institutions to boost financial performance by “shredding” the upcoming business lending wave.

Performance

What's at stake for lenders

Cornerstone’s annual surveys have found that more than half of financial institutions cite C&I loans as a high priority each year, Pruis said. However, most don’t measurably increase C&I from year to year. Instead, many focus on commercial real estate (CRE) and residential real estate (1-4 family homes).

Joel Pruis Cornerstone Advisors headshot

Pruis

Examining federal Call Report data from 2016 to Q1 2024 for banks with assets of $70 billion or less, Cornerstone found that only one in 10 institutions that started in 2016 with less than 18% of its portfolio in C&I was able to increase that percentage by 2023. For most of the lenders, C&I lending turned out to be “mush.” In surfing, mush is a wave that may look enticing as it approaches but fizzles out before you can ride it.

But the top 20% of C&I lenders among those with $70 billion or less in total assets are “shredding” C&I loans, Pruis said. And it’s paying off for them with better bank performance on several fronts.

“We’ve correlated the C&I lending segment to better loan yields overall, better net yields, better deposit growth rates, lower loan-to-deposit ratios, higher net interest income to average assets, and higher return on average assets and return on average equity.”

These top lenders had to start somewhere with building a loan program for business loans. 

Want more articles like this?

Across all asset sizes, the top 10 C&I lenders have nearly 49% market share of commercial lending. Leaving commercial loans to the largest lenders will cost financial institutions opportunities to improve their performance. 

Timing, magnitude

The potential for a C&I surge

How much is at stake in future commercial and industrial business lending? And when will be the best time to pursue C&I growth?

Pruis noted that C&I lending ebbs and flows with changes in the economy. Commercial loan balances historically fall during economic slowdowns, then increase substantially during the growth cycles that follow downturns.

Indeed, measuring C&I balances from the low to the high of an expansionary period shows commercial lending grew by the following amounts during recent upcycles:

  • 1993-2001: 87.5%
  • 2004-2008: 82.6%
  • 2010-2023: 137.3%
commercial and industrial lending trends

Source: Cornerstone Advisors presentation on C&I lending

Since January 2023, commercial and industrial loan balances have fallen slightly or stagnated at around $2.8 trillion, Pruis said. “Does that mean that we are starting to get to that point where maybe we’ll get to a slowdown? Is it going to be the soft landing? Who knows. We're sitting in the water waiting to see that next tasty wave coming our way.”

But by extrapolating the average balance decline along with increases in C&I loan balances that follow once the economy peaked, Cornerstone sees a tremendous opportunity ahead for banks and credit unions in business loans.

“What’s at stake is $1.7 trillion,” Pruis said. That’s the potential growth in the C&I segment. And that excludes owner-occupied CRE.  

"What’s at stake is $1.7 trillion. That’s the potential growth in the C&I segment."

Facing challenges

C&I lending obstacles

Why don’t more institutions already take advantage of C&I “waves” when they appear?

Unfortunately, Pruis said, many banks and credit unions with the desire to grow commercial (or member) business lending tend to “duck dive” C&I opportunities. A duck dive in surfing is when a surfer avoids the wave by diving underneath it. It’s similar to the approach lenders might take when their efforts to boost business lending take too long or vary from existing practices.

Lenders might shy away from C&I lending for several reasons, he noted:

Impatience: Commercial real estate loan demand often arises from an immediate need. The lead time between building a network and seeing it pay off can be longer for C&I loans. Lenders more familiar with shorter sales cycles in CRE lending may get impatient.

Credit risk: In C&I lending, at least part of the collateral is intangible. The emphasis for commercial credit risk management and evaluation is cash flow, fixed charges coverage, and working capital cycles. Lenders are often more comfortable with loans secured by real estate and a focus on debt-service coverage and loan-to-value.

Treasury management: Building the C&I portfolio relies on being able to offer many other services critical to the relationship, such as ACH, wires, positive pay, and account analysis.  

Digital engagement: CRE credit risk management tends to focus primarily on annual tax returns and rent rolls, while C&I lending relies on higher-frequency reporting. Both can be done most efficiently when some member or customer engagement occurs digitally, using secure portals and automated email reminders to gather routine documents, for example.

Networking, automating

How to prepare for more C&I loans

To fully capitalize on the forthcoming C&I wave, institutions need the right products, systems, people, and technology. This involves:

Building additional networks: In addition to existing networks, start plugging into different areas immediately to account for the long sales cycle. “It’s going to be six to 24 months before somebody’s going to be ready to say, ‘Hey, my existing bank doesn’t serve me well anymore. Can you take a look and see what you can provide to me?’” Pruis said.

Adjusting credit risk evaluation: What will the bank or credit union need to do to evaluate the risk up front for a C&I loan? What will need to change for solid commercial credit analysis? Lending practices, loan policies, and procedures must be developed to monitor and stay on top of risk.

Evaluating product offerings: Identify what deposit and treasury management products and online banking services will be needed. The institution can then plan to establish those itself or utilize a correspondent banking relationship.

Engaging digitally. Supporting the frequent engagement and monitoring activities that are part of business lending is easier when a bank or credit union can automate many steps in lending and credit risk management processes. For example, with Abrigo’s small business loan origination software, lenders can perform manual checks or changes during decisioning but still have the option to automate the remaining steps afterward.  Digital engagement is also crucial for continued growth at financial institutions. Younger consumers (those born after 1981) say having online access to banking services is at the core of their banking preferences.

Conclusion

A solid commercial and industrial loan offering can drive performance at banks and credit unions. Being ready to capture a share of the $1.7 trillion “wave” of C&I lending expected in years ahead will position financial institutions for better performance and the ability to better serve the needs of their communities.

Prepare for the next credit cycle. Watch this webinar for tips to maintain an efficient credit process at banks and credit unions.

Watch Webinar
Whitepaper

Ahead of the curve: A banker’s podcast episode 17 – Core deposit studies

Read More
Whitepaper

7 Ways to use your data for better credit risk management

Read More
Success Stories

How Capital City Bank plans to expand small business lending with Abrigo

Read More
About the Author

Mary Ellen Biery

Senior Strategist & Content Manager
Mary Ellen Biery is Senior Strategist & Content Manager at Abrigo, where she works with advisors and other experts to develop whitepapers, original research, and other resources that help financial institutions drive growth and manage risk. A former equities reporter for Dow Jones Newswires whose work has been published in

Full Bio

About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

Make Big Things Happen.