Regional banks with an Indianapolis presence are taking advantage of a recovering economy and pent-up lending demand to aggressively shop loans to midsize companies.
The shift in lending habits highlights an encouraging turnaround in the banking industry, which tightened credit requirements as the number of deteriorating loans escalated during the recession.
Several regional banks operating in the city report improving loan pipelines and are putting out the welcome mat for the thousands of midsize companies across the country.
“There certainly is an increase in middle-market activity, and we are certainly experiencing that in central Indiana,” said Gary Hentschel, president of Cleveland-based KeyBank’s central Indiana district.
Credit improvements helped KeyBank turn a $173 million profit in the first quarter while reducing its loan-loss reserve, a fund to handle future loan losses, by $40 million.
In the Indianapolis area, KeyBank’s commercial loan portfolio has had a “very noticeable increase” in activity, said Hentschel, who said company policy prevented him from being more specific.
Columbus, Ohio-based Huntington National Bank experienced a 7-percent increase in overall commercial lending in the first quarter and a 6-percent bump in middle-market loan activity compared with the fourth quarter in just the Indianapolis area.
Another regional bank with a local presence, Cincinnati-based Fifth Third Bank, saw commercial and industrial loans grow 4 percent in the first quarter compared with the same period a year ago.
In Indianapolis, Fifth Third’s commercial loan production is up a whopping 200 percent from the first three months of last year, said Kevin Hipskind, a senior vice president who leads the bank’s commercial division in central Indiana.
“The cash levels at banks are at historical highs,” Hipskind said. “The only way they can make that work for shareholders is to lend it out.”
National banking experts attribute the strong growth in the Great Lakes region to an uptick in manufacturing. Though Indiana remains heavily dependent on automotive, local bankers say Indianapolis offers a more diversified economy.
Health care and distribution sectors are picking up, too, they say, providing even more optimism for an economic recovery.
The rosier outlook is leading companies to seek financing to fund expansions or to pay off existing debt at a cheaper rate. In turn, banks flush with cash are trying to win new business with more attractive terms.
But Indianapolis bankers contend there’s more to generating additional business than simply the enticement of cheaper rates. It’s about building relationships and getting company owners to bring more of their business—whether professional or personal—to the bank.
Huntington has doubled its number of bankers within the past year who specialize in small-business and middle-market lending. And KeyBank has added 11 branches in the Indianapolis area in the past two years.
Fifth Third, meanwhile, focused on building relationships with potential clients, so once the economy began showing improvement, they might seek the bank for financing.
Keeping those relationships is critical in the current lending environment as business customers are more prone to explore several banking options in better economic times. In fact, much of the loan growth some banks are experiencing is the result of taking it from a competitor.
“We have seen clients switch banks,” said Mike Newbold, president of Huntington’s central Indiana region. “Frankly, a good portion of our growth has come from that.”
Data from ThomsonReuters shows costs for middle-market borrowers dropped to historic lows in the first quarter as banks tried to entice companies into borrowing.
Newbold said Huntington doesn’t compete on interest rates and suspects some of the bank’s new business stemmed from a “breakdown in service” at another bank, or a customer simply may have had a credit or capital need that required a second look.
The commercial switch rate—the rate at which companies change banks—is about 10 percent, a historic high, said Fifth Third’s Hipskind.
He concurred that switching isn’t always about price, though.
“Over the last three years, it’s been an extremely tough environment,” Hipskind said. “They were uncertain about the future. The last thing they wanted to do was switch their relationship.”
Most of the increase in loan demand is generated from new and existing clients wanting to extend credit lines or increase inventories, for instance.
There are thousands of middle-market companies in the country, with revenue ranging from $5 million to $500 million, giving banks plenty of opportunity to lend.
The number of loans dropped during the recession while deposits increased, throwing the loan-to-deposit ratio out of whack.
Said Hentschel at KeyBank: “It makes sense to try to get that money to work for your shareholders, so to speak.”
But John Reed, president of David A. Noyes & Co.’s Investment Banking Group, cautioned that, overall, commercial lending still lags pre-recession levels by a wide margin.
Said Reed: “It’s hardly a rush to the doors for lending.”•