Magazine article American Banker

Do Cash-Flow Trends Signal Loan Growth?

Magazine article American Banker

Do Cash-Flow Trends Signal Loan Growth?

Article excerpt

With the third quarter ending today, the message on commercial lending continues to be mixed and depends largely on the size and type of the borrower.

Bankers have said at various forums this month that small and midsize businesses started to draw more on their credit lines, especially during the second quarter, though the pace slowed up a bit in the past three months as the economy faltered.

Large borrowers, on the other hand, have stayed away from bank credit because of excess cash on their balance sheet and access to other sources of funding. Some bank economists, however, say large corporations will return to the loan market in the near future.

Stuart Hoffman, the chief economist at PNC Financial Services Group Inc., said there are indications that cash-flow growth has tapered off while capital investments have picked up in the past few months. That means that with shrinking cash flow and growing funding needs, large corporations (those with revenue of $500 million or more) will be forced to look for outside funding.

"We do see it more in small- and middle-market, and I think we will begin to see even larger businesses either tap their credit lines or open up new lines," Mr. Hoffman said Tuesday. "It will be wrong to say that if C&I loans grow over the next couple of years that it will all be small and medium-size borrowers."

Mr. Hoffman spoke in an interview after a meeting PNC held in Jersey City for the release of its twice-yearly economic outlook survey.

The Pittsburgh company polled 1,200 business owners and executives, all PNC loan customers, in its five-state banking territory in July and August. Thirty-one percent said they were upbeat about the economy for the next six months, against 29% in the spring survey and just 17% in the fall 2003 survey.

The optimism was tempered by several factors that were not raised in the spring survey, including high energy costs. Other factors cited were health-care costs, the possibility of inflation, and interest rate hikes. More than half the respondents, 54%, said they expected prices charged by their suppliers to increase in the next six months. They also said rising costs are making it harder for them to hire or give raises. …

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