Commercial Loans: A Bubble About to Burst?
Vulnerability is growing at a handful of banks.
Commercial and industrial loans have provided a safe haven for banks in the aftermath of the financial crisis. Burned by real estate in all its forms--residential mortgages, land and construction loans, and commercial real estate--banks turned to business lending to find growth, egged on by politicians eager to aid the economic recovery. Over the past two years, banks have lowered lending standards and prices in an attempt to build their books. Only time will reveal the extent of the building bubble, but we think at least a few large banks have already accumulated dicey levels of exposure to C&I loans. We would be wary of holding these banks at high prices, and think investors in the rest should keep a close eye on regional economies.
Commercial and industrial loans are made to businesses for a variety of purposes and to nearly any industry. They include both working capital and term loans and can be made on a secured or unsecured basis with widely varying contractual terms and maturities. Seasonal and working capital loans finance current assets like inventories and receivables and are often structured as revolving lines of credit. Term loans are usually associated with a fixed repayment schedule and used to finance assets including plants, equipment, and long-term working capital.
Jim Sinegal does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.